I should simply spend all of my estate rather than giving it to my heirs, since the death tax will take it all
This is a self-defeating myth for two reasons.
First, the 2010 Tax Act limited the maximum estate tax, which is imposed on the largest estates, to 35 percent. That can be a sizeable amount of wealth to pay to the government, but it's far less than the 55 percent maximum that the new tax law prevented [source: Herpe].
Second, the entirety of a granter's estate doesn't necessarily have to be taxed through the estate tax. If the estate is small enough (equal to or less than $5 million per taxpayer in 2011), it receives an exemption from the IRS. This allows many taxpayers to avoid the estate tax. Furthermore, gifts to charitable organizations, retirement accounts left to spouses and wealth transferred to family as a gift all fall under individual nuances of the tax code. They may be taxed differently and at different times. By planning the divestment of your estate to include these items, you may be able to reduce significantly the burden on your heirs [source: Mayerhoff].
For more information on the death tax and related taxes, check out the links below.
- American Family and Business Institute. "What is the Death Tax?" 2009. (Jan. 20, 2011)http://www.nodeathtax.org/deathtax
- Combs, Susan. "Texas Taxes: Inheritance Tax." Window on State Government. (Jan. 22, 2011) http://www.window.state.tx.us/taxinfo/inherit/
- Herpe, David A. et al. "Wealth Transfer Planning Considerations for 2011 and 2012." McDermott Will & Emery. Jan. 20, 2011. (Jan. 22, 2011) http://www.mwe.com/index.cfm/fuseaction/publications.nldetail/object_id/9e8952ff-a1f5-4fa8-99bb-f5e9a9b9f266.cfm
- IRS. "Estate and Gift Taxes." June 22, 2010. (Jan. 11, 2011) http://www.irs.gov/businesses/small/article/0,,id=98968,00.html
- IRS. "Forms and Publications." Jan. 21, 2011. (Jan. 22, 2011) http://www.irs.gov/formspubs/index.html
- IRS. "Introduction to Estate and Gift Taxes." Dec. 14, 2009. (Jan 22, 2011)http://www.irs.gov/pub/irs-pdf/p950.pdf
- Jacobson, Darien B. et al. "The Estate Tax: Ninety Years and Counting." IRS. June 18, 2008. (Jan. 11, 2011)www.irs.gov/pub/irs-soi/ninetyestate.pdf
- Mayerhoff, Gerald L. "Giving Foundation: Minimizing the Inherited Income Tax." Baptist Health South Florida. Feb. 6, 2004. (Jan. 22, 2011)http://www.baptisthealth.net/en/giving/Pages/Minimizing-the-Inherited-IncomeTax.aspx
- Money-Zine.com. "Federal Inheritance Tax." (Jan. 22, 2011) http://www.money-zine.com/Financial-Planning/Tax-Shelter/Federal-Inheritance-Tax/
- Oregon Department of Revenue. "Inheritance Tax." Oregon.gov. Aug. 31, 2010. (Jan. 22, 2011)http://www.oregon.gov/DOR/BUS/inher-general.shtml
- Pacific Life. "Estate Tax Exemption Amount." December 2010. (Jan. 22, 2010) http://www.pacificlife.com/Channel/Educational+Information/Estate+Planning+Concepts/Estate+Tax+Exemption+Amount.htm
- Policy and Taxation Group. "Horror Stories & Articles." 2009. (Jan. 20, 2011)http://www.policyandtaxationgroup.com/html/stories.html
- Retirement Living Information Center. "Taxes by State." January 2011. (Jan. 22, 2011)
- Schwab, Carol A. "Planning Your Estate: Estate and Gift Taxes." North Carolina Bar Association. October 2001. (Jan. 19, 2011) http://www.ncbar.org/download/planningYourEstate/taxes.html
Many Americans don't think about their tax bills until the new year. But there are things you need to do before Dec. 31 if you want to pay less later.