Federal Estate Tax

ESTATE TAX EXEMPTION

Year	Applicable Exclusion Amount	Tax Rate on Excess
2005	$1,500,000.00	45% on amounts between $1,500,000 and $2,000,000 plus 47% on amounts over $2,000,000
2006	$2,000,000.00	46% on amounts over $2,000,000
2007	$2,000,000.00	45% on amounts over $2,000,000
2008	$2,000,000.00	45% on amounts over $2,000,000
2009	$3,500,000.00	45% on amounts over $3,500,000
2010	unlimited
2011	$1,000,000.00	41% on amounts between $1,000,000 and $1,250,000 plus 43% on amounts between $1,250,000 and $1,500,000 plus 45% on amounts between $1,500,000 and $2,000,000 plus 49% on amounts between $2,000,000 and $2,500,000 plus 53% on amounts between $2,500,000 and $3,000,000 plus 55% on amounts over $3,000,000

UNLIMITED MARITAL DEDUCTION

Any property passing to a surviving spouse is exempt from federal estate tax. This property can pass either outright or in a trust that benefits the surviving spouse during lifetime (typically called a Marital or QTIP or C Trust). The terms of this trust must give the surviving spouse the right to all the income during the survivor's lifetime.

A surviving spouse who is not a U.S. citizen is not entitled to the unlimited marital deduction. Any assets left to such spouse would utilize the estate tax exemption and be subject to tax if the value were over $1,500,000. This tax can be avoided by setting up a Qualified Domestic Trust for the surviving spouse. This type of trust is drafted with very specific requirements to satisfy the IRS rules.

ANNUAL GIFT TAX EXCLUSION

Each person is allowed to give up to $11,000 to as many recipients as they wish on an annual basis. A person can also make gifts beyond that amount but must file a gift tax return to report such additional gifts. No gift tax will typically be due because such gifts will be allocated against a person’s estate tax exemption. Although the applicable exclusion amount for estate taxes is currently at $1,500,000, the exemption for gift tax purposes remains at $1,000,000. This $1,000,000 must be used up prior to any gift tax actually being paid.

Payments of tuition and medical expenses of another person are also allowed as tax-free gifts as long as such payments are made directly to the provider of such services.

There are no income tax consequences of making a gift. The person making the gift (donor) gets no income tax deduction and the person receiving the gift (donee) does not have to report any income. A donee does, however, keep the income tax basis of any property received which may result in capital gains to the donee upon the sale of such asset.

STEP UP IN BASIS

When a person dies, any assets owned by such person receive what is referred to as a step-up in basis. What this means is that the basis of such assets becomes the fair market value of the asset on date of death. Thus, if a beneficiary sells such asset there will be no gain or a minimal gain. The beneficiary does not have to go back to the date the asset was purchased by the decedent, but rather only needs to go back to the date of death in order to calculate any gain on such asset.

If spouses own an asset as community property, the entire asset gets the step up in basis. If the asset is owned in joint tenancy, then only half the asset gets a step up in basis. This is because, with community property, each spouse is considered to own an undivided 1/2 interest in the whole asset where as in joint tenancy, each spouse only owns a 1/2 interest in the asset. Thus, it is generally best for spouses to hold their joint assets as community property.

CALIFORNIA ESTATE TAX