Finance 101: Estate tax hits few ordinary people

NEW YORK (AP) — As attention turns from Michael Jackson's death to the complex estate the pop icon left behind, experts are sorting through his holdings and putting price tags on their value — with an eye on the tax bill they will generate.

While the superstar's property is worth far more than ordinary people could ever dream of amassing, some of the issues that will come up surrounding Jackson's estate taxes reflect common concerns about the so-called "death tax."

The estate tax is a tax on the transfer of property when someone dies, which means that the estate itself — not the heirs — foots the bill. (Of course, it can significantly eat into the amount the heirs inherit.)

For the most part, only very large estates have to pay — in 2004, just 0.82 percent of all estates were taxed by the federal government. That figure will likely drop, according to the Internal Revenue Service, because the size of estates exempt from the tax more than doubled — to $3.5 million this year from $1.5 million in 2004.
Here are some questions and answers about the estate tax.

Q: What assets are included in an estate?
A: The federal estate tax is calculated by adding up the fair market value of what you own — cash and accounts, stocks and bonds, real estate, trusts, life insurance, businesses, personal property like art work or collectibles, and so forth — at the time of your death. In certain cases, it may also include money or property that was transferred during the deceased's lifetime. The total is called your "gross estate."
Then certain deductions may be taken, like mortgages and other debts, and property left to your spouse or to charity. The amount that remains is your "taxable estate."
Q: Who has to pay estate tax?

A: For 2009, up to $3.5 million per person in assets are excluded from the federal estate tax. The value of property above that level is taxed at a rate of 45 percent. An estate worth less than $3.5 million doesn't even have to file a federal return, said William E. Massey, senior tax analyst for Thomson Reuters.
State thresholds vary, and not every state has an estate tax. Check your state's tax department Web site for details.
Besides the first $3.5 million, everything that is left to a surviving spouse is exempt from federal estate tax. The taxable estate may also be reduced by deductions, funeral expenses and any claims against the estate.
In 2010, the federal tax as it currently stands will expire; if Congress does not change the law, there will be no estate tax next year. In 2011, the old exclusion of $1 million returns, and the top rate for holdings above that amount would jump back to 55 percent, where it was in 2001.
Several bills have been proposed in Congress to address the issue, but none has passed yet.
Whether or not a person has a will doesn't affect the tax their estate owes, said Lynette Atchley, an accountant and certified financial planner in Redlands, Calif.

Q: Are small business owners more at risk for having to pay the estate tax?
A: The value of a business can depend on a number of factors, including how closely associated it was with the deceased person. But business owners do have a challenge in planning for issues like succession and transfer of ownership, and the plans they make could greatly affect estate taxes, said Bill Rys, a tax counselor with the National Federation of Independent Business.
"You need to sit down with an adviser to get a good sense of what the value of your business is, and what works best for the kind of business that you have," he said.
There are provisions that allow family-owned businesses to put off paying the entire estate tax bill at once, said Steve Armstrong, director of transactional tax planning for Rehmann, a financial planning and consulting firm based in Saginaw, Mich., but sometimes it's necessary to sell off part of the company's holdings to pay the tax.

Q: Are there legal ways to reduce the size of an estate if it appears that it might be subject to estate tax?
A: There are several different steps that can be taken to reduce an estate tax bill, but they must be done before the person dies. Among the options are setting up different types of trusts, giving cash gifts or transferring property, particularly real estate or securities, to family or friends.
In some cases the value of the property or gifts may be added back into the estate, but it would be the value at the time of transfer, not including any appreciation that has happened since that time, Armstrong said.


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