Feb. 25, 2005 — Q: What is the best way to protect your money from inheritance taxes if you are elderly and approaching the last few years of your life and would like to pass as much on as possible to your heirs? — Mike L., Orrville, Ohio
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A: Start giving it away now. You can give $11,000 a year without hitting the so-called “gift tax.” If you're married, your spouse can also give $11,000 tax free, which means you can give away $22,000 a year to each heir. The total amount you can give away tax free in any year is $1,000,000.
Another way to beat the tax man is to hold onto any stocks or assets like real estate that have appreciated in value since you acquired them. If you bought a stock for $10, for example, and it's now worth $100, you'll pay capital gains taxes if you sell it now. But if you leave it to your heirs, the tax goes away. The reason is that “cost basis” for that asset (which was $10 for you) gets marked up to the price on the day your heir inherits it. So the capital gain goes with you. (Which I suppose means you can take it with you after all.)
The other thing you can do is to keep trying to stay healthy. The estate tax is gradually being phased out over the rest of this decade. For 2005, for example, the first $1.5 million of your estate is not taxed, and the rest is taxed at up to 47 percent. By 2009, the amount you can pass on tax free rises to $3.5 million and the top tax rate drops to 45 percent. By 2010, the estate tax goes away entirely and Uncle Sam won’t get a dime of whatever you pass on to your heirs.
But there's a catch. Doing away with all those taxes has left a big hole in the federal budget. In order to get the changes made in 2001, Congress came up with a “compromise” to keep the cost down: the full estate tax returns in 2011. (The first $1,000,000 will be tax free and the top rate jumps to 55 percent.)
So unless Congress extends the repeal, living a long, healthy life past 2010 is going to cost you.
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