What you need to know about estate taxes

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Last year, you may be aware, was an unusual year because of an unexpected reprieve from taxes on the estates of those who died in 2010. That is no longer the case. If you’re involved in estate planning for a loved one or yourself, it’s important to know that estate tax rates have come back in force this year and beyond. The Pennsylvania Institute of Certified Public Accountants offers a rundown on some of the complexities of estate tax issues.

Are you aware of all the assets that are part of your estate?

Many individuals do not understand what kinds of assets make up their estates. Many people have the misconception that their estate consists solely of cash in their bank account. They may be in for an unpleasant surprise, however, if they don’t consider the current value of all the assets. A parent who did not have a lot of cash on hand still may have owned a home that has increased substantially in value over the years, especially if it’s located in an area with high or rising property values. Add in the value of a retirement account or other assets, and the total may quickly jump. That may also be the case with a small business that family members built from scratch into a thriving enterprise, especially if the company owns valuable property or equipment.

Also be mindful that while an estate may not be subject to federal estate tax, the executor may still have to pay tax at the state level, depending upon the appropriate state’s laws. The commonwealth of Pennsylvania has an inheritance tax, not an estate tax. An estate tax is a tax on the right to transfer property; an inheritance tax is a tax on the right to receive property. The mechanics basically work the same way: from a gross estate, there are allowable deductions and then a tax rate is applied to the net taxable estate. In Pennsylvania the tax rate depends upon the recipient of the property. Spouses have a zero percent rate. Lineal relatives, such as children, grandchildren, parents, or grandparents have a 4.5 percent rate. Other relatives such as sisters or brothers have a 12 percent rate. Any remaining recipients are taxed at a 15 percent rate. Regardless of what it’s called or what the rate is, the tax is generally assessed on and paid from the estate, rather than being charged to and paid by the recipient heirs. Your CPA can help you in the accounting and valuation of your estate to determine whether your situation calls for savvy estate planning for both federal and state purposes.

The tax returns

On Dec. 17, 2010, President Obama signed into law the “Tax Relief Act of 2010.” In this bill Congress reinstated the estate tax for decedents dying after Dec. 31, 2009. The new rules are only temporary, and will sunset on Dec. 31, 2012. Executors of deceased taxpayers must pay taxes on estates valued at more than $5 million. There are considerations for surviving spouses, which should be discussed with your CPA. The estate tax will be based on the new 35 percent top rate.

In light of the rules that were in effect prior to the “Tax Relief Act of 2010,” Congress afforded executors of decedents dying after Dec. 31, 2009, and before Jan. 1, 2011, the option to elect to not come under this newly revived estate tax. In this case, the estate would pay no estate tax as originally described above, but beneficiaries would be subject to the modified carryover basis rules.

A CPA can help

Estate taxes are complicated. A free brochure is available in the Communication Center on PICPA’s website (www.picpa.org/­communitycenter). It is wise to consult with a CPA about long-term estate plans.

Turn to your CPA with all your questions about estate tax planning or any other financial concern. To find a CPA near you or access the free brochure, visit http://www.IneedaCPA.org.

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