Ask Money

Estate taxes

Chris Farrell May 20, 2009

Question: My elderly parents (82 & 88 years old) own a large (2000 sq ft) completely renovated 1805 farm house and 100 acres in SC – all paid for. My brother and I will inherit this property upon the death of our parents. It is vital to my parents that they leave this property as a gift to their children; they are proud that they have it to give to us. However my parents think that there won’t be many estate taxes on this property since it is no longer an active farm and the local property taxes list the value at $200,000. My brother and I are concerned that the estates taxes will take away most of this inheritance. As a solution to this problem, my understanding is that if our parents sell us this property now, with a codicil that they will stay in the house until their deaths, there won’t be any inheritance taxes to us. We would be responsible for the yearly property taxes. Also, who decides, upon my parents’ deaths, the value of the property in order to calculate the amount of inheritance tax? Any input is gratefully accepted. Thank you. Ellen, Willow Spring, NC

Answer: I doubt if you need to worry about the estate tax. Most people don’t need to be concerned about it because the amount exempted from the tax is so large.

To be sure, estate tax law is extremely bizarre at the moment, and that’s putting it kindly. Here’s the rub: Congress and the White House cut a deal in the negotiations for the 2001 income tax cut that increased the amount that individuals can leave to heir’s tax free. It also lowered the estate tax rate on any money owed to Uncle Sam. In 2009, an individual could leave her heirs $3.5 million free of taxes. That’s $7 million for couples. For sums above that the estate tax rate starts at 13% and tops out at 45%. Yet in 2001 to make the budget projections work and to satisfy opponents of the “death tax” the estate tax was slated to disappear completely in 2010 and then return in 2011. Go figure. I can’t.

But it looks like the estate tax disappearance and reappearance act won’t happen. The Administration’s current budget blueprint makes the 2009 rules permanent. In other words, individuals with estates of $3.5 million or less would be exempt from the top 45 percent estate tax rate, and married couples could end up sheltering a combined $7 million for their heirs from tax (depending on how marital assets are titled).

I’d see what the law becomes first. Then, if you want you can get some additional peace of mind by having an independent appraiser value the home and property for you. And I’m sure your parents have other assets as well that should be considered. I’d also with a reputable estate attorney. But I wouldn’t do anything without good evidence that you and your brother are among the estimated 0.2% of all estates this year that might be subject to the tax. Most people who worry about the estate tax aren’t subject to it.

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