Estate Tax Debate Intensifies

Year-end is often a time for tax planning for individuals, families and businesses. Planning is especially important in 2012 due to the current economy and the recent election.

The estate tax is frequently debated. Often referred to by journalists as the "death tax," the estate or inheritance tax is levied by the federal government on the taxable value of a deceased person's estate.

Taxable value is determined by calculating the fair market value of all assets owned on the date of an individual's death and subtracting allowable deductions. Allowable deductions include liabilities of the individual, certain charitable bequests, funeral expenses and administrative expenses of the estate. The calculation of taxable value is the same regardless of the method used to transfer estate assets, such as a will, trust, or joint ownership.

In most cases, if an estate passes to a surviving spouse or to a charitable organization, no estate tax is due. Under current law, the first $5.12 million (adjusted for inflation) of an estate passes to heirs tax-free. After the $5.12 million exemption, an estate tax is levied at a 35 percent rate. The gift tax follows the estate tax exemptions, and any gift tax exemption used during life reduces the estate tax exemption at death.

The estate and related gift tax issue is on the national radar because it is part of the Bush-era tax cuts that are slated to end on December 31, 2012. Unless further Congressional action is taken, the rate rises as high as 55 percent while the exemption level drops from $5.12 to $1 million.

There are a number of measures under consideration by both parties that could preserve or alter the current favorable rates. There has been considerable discussion of setting the estate exemption amount at $3 to $3.5 million. Congressional action, if taken, won't happen before December 1, but could be underway before year's end, or made retroactive if action is delayed until 2013. There is much that is still unknown regarding future changes.

What we do know for certain is that the debate about estate taxes will continue.

The arguments against increasing rates and dropping exemption levels include:

Double taxation

Opponents believe a person's estate represents wealth that was accumulated over a lifetime, and was already burdened through various taxes already levied. Estate taxes may be interpreted as taxing the same earnings twice.

Government vs. personal decision-making

Opponents argue that distribution of one's life assets is a personal decision and should not involve or benefit the government.

Effect on entrepreneurship

Opponents argue that a tax rate system that allows the government to collect 55 percent of the asset value on the death of an individual will limit growth and the inertia to accumulate wealth.

No real revenue gain

Costs for collecting taxes are high when compared to the real gain in revenue the higher taxes achieve. Since the number of taxpayers with estates larger than $5.12 million is limited (.2 percent of all estates in the U.S.), the actual net gain may be limited.

Proponents for increasing the tax say that individuals with large estates can afford to pay the tax and argue that the bulk of funds in an inherited estate were accumulated through unrealized capital gains and not through prior salaries that required payroll taxes.

Although we are uncertain about future legislation, there are strategies that can be considered for 2012:

Gift tax exclusions

An individual can make a gift up to $13,000 or a couple can make a gift up to $26,000 per recipient each year that is excluded from gift tax calculations.

Tuition and medical expenses

Payments for tuition or medical expenses can exceed the $13,000 limit and not be treated as a taxable gift as long as payment is made directly to the provider and not to the student or patient.

Charitable gifts

Donations to qualified charities are exempt from gift taxes. Charitable giving will likely offer income tax benefits as well.

Gifts of property

Consider the tax implications before giving. To minimize estate tax, give property with the greatest future appreciation potential. To minimize the donor's income tax, don't gift property that has declined in value. A better option is to sell the property, take a tax loss and then gift the proceeds from the sale. With the gift exclusion at $5.12 million for the current year, 2012 is an excellent year to consider larger gifts.

Business interests

Business owners may be able to gift ownership interests that might be eligible for valuation discounts. A professional valuation is advisable in these cases.

All estates are unique to the individuals involved, so it is important to discuss each situation with a professional advisor to identify the strategies that are most appropriate.

James. G. Shumate, CPA, MST, is the managing partner at Dennis, Gartland & Niergarth in Traverse City. Jim specializes in tax planning for individuals and businesses, with added expertise in manufacturing, agriculture, co-ops and estate planning. For more information, call 231-946-1722 or email