The following is an excerpt from A Parent's Guide to Wills & Trusts: For Grandparents, Too (2nd edition), copyright 2007, 2008 Don Silver and excerpt reprinted with permission.
QUESTION: I have a simple question. I am very ill. I have one child, a son who’s 44. I have some stocks that I bought many years ago for $20,000. They are now worth $120,000. This is the only asset of any value that I’ve ever had. After I die, my son will be selling the stocks to get cash. Will my son pay less to the IRS in taxes if I give the stocks to him before I die?
No. Because the total value of all of your assets is below the federal gift-tax and federal death-tax exclusion amounts, there would be no federal gift tax or death tax whether your son received the stocks now or after your death. But if your son received the stocks from you now as a gift (rather than inheriting them from you later), he would pay more in federal income tax on the sale of the stocks after your passing. That’s because the income tax basis is different with gifts and inheritances.
In some cases, last-minute gifts will save on taxes. Whether gifts or inheritances will save taxes depends on a number of factors. See pages 181-191 for more information.
QUESTION: I am a widow with two adult children. My assets total $2 million. I’m about to buy a life insurance policy that will pay $1 million to my two children upon my death. I’ve heard that there is no death tax on life insurance. Is that true?
Whether life insurance will be subject to death tax depends on four main factors: (1) whether you own on control the life insurance policy, (2) the total value of your taxable estate, (3) the year you pass away and (4) state death-tax laws in your state.
Owning or controlling life insurance
If you own and/or control life insurance, it is counted in calculating your taxable estate for federal death-tax purposes. See below for ways to keep life insurance from being counted as a taxable asset. But even if insurance is part of your taxable estate, no federal death tax may be due. Whether your estate will owe federal death tax depends on when you pass away.
Federal death-tax exclusion amount
Under federal law, the amount excluded from death tax changes over time. There is a federal death tax exclusion of $2 million for deaths that occur in 2008, $3.5 million for 2009 deaths, an unlimited amount for deaths in 2010 and $1 million for deaths that occur in 2011 or later.
If you pass away in 2008, the exclusion would be $2 million but you’d have $3 million in assets (if you owned or controlled the $1 million life insurance policy). The $1 million above the exclusion would generate $450,000 in federal death tax
($1 million times the 45% death tax rate).
So, instead of your two children being the only beneficiaries of the life insurance policy, your children would share the proceeds with their “Uncle Sam”—the government.
State death-tax laws
Finally, state law may not be the same as federal law. There could be state death tax whether or not there’s federal death tax.
HINT: There are two ways to keep the insurance proceeds from being taxable for federal death-tax purposes: (1) have an irrevocable life insurance trust (i.e., a trust that cannot be changed) or (2) have your adult children own, apply for and pay for the policy.
(By the way, a life insurance trust is not the same as a living trust.)
There is no such thing as a "death tax". I believe the author means estate tax, but is using the right-wing talking point instead. That alone invalidates everything he says. Too bad, because if not for that, he would seem to know what he's talking about.
Posted by: non-partisan insurance agent | May 08, 2008 at 02:37 PM
He does know what he's talking about. Don't let your bias get in the way of good information.
Posted by: FMF | May 08, 2008 at 02:52 PM
He does know what he's talking about, but there is no such thing as a "death tax". There is such a thing as an "estate tax". If you want to call it something else in order to convey meaning, an accurate term would be "inheritance tax".
Posted by: rwh | May 09, 2008 at 11:58 AM
RWH --
I think the tax is commonly called "estate tax", "death tax" (because it occurs at death), and "inheritance tax."
To me, it's just as bad when someone ignores good information because they have their own political leaning than it is to write the post with a political bias in the first place -- that's my comment to "non". If he wanted to be heard, how about making an intelligent comment instead of a snarky response?
Posted by: FMF | May 09, 2008 at 12:27 PM
I'll agree that intelligent communication is preferable and there is an effective and an ineffective way to respond.
I also think the person who wrote the post had a reason for the terms he chose to use and it's fair game to discuss it.
There is little question that the term "death tax" had its origin in GOP strategy sessions as a talking point and that origin is fairly recent, within the last 10 or 15 years, or roughly about the same time we starting hearing the term "Democrat Party". I'll even concede that it has been quite effective as a rhetorical tool. But in my opinion it is a politically charged term, intended to stifle debate rather than stimulate it.
But he did give good advice for the <2% of the estates that are subject to the tax.
Posted by: rwh | May 09, 2008 at 02:58 PM
Your "<2%" is grossly under the facts. Those hardest hit by this death tax, so called because it applies at death [and did not originate with either political party, as a matter of fact, but with those who sell products to help individuals avoid death taxes], are the middle Americans, the small mom-and-pop owners of businesses, those businesses with inventory, farmers, etc. whose heirs have to sell/dismantle/end the enterprise in order to pay federal death taxes - on money they have already paid income taxes on. The really wealthy have all kinds of devices to avoid these huge tax bills. It's the little guys that get hurt. They work all of their lives to built up something for their families, contributing all the time to the rest of us with their taxes, their job creation, and their provision of goods and services, then they get their earnings taken away from them. And the valuation process is not what you could call fair, either, so settling up with Uncle Sam is just a fire sale for most of these folks. The label may be "inheritance" or "estate" tax in the IRS lexicon, but the facts make this a death tax. Intelligent communication requires attention to facts, not just giving lip service to the labels spun to make something this distasteful palateable to those whose throats this is being stuffed down. Those of us who suffer from it know it's a death tax, and a double dip at that.
Posted by: Katie Wont | July 11, 2008 at 11:03 AM