The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your "Gross Estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your "Taxable Estate." These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify. After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit. The State of Michigan does not currently impose an inheritance tax and only Taxable Estates that are larger than the Estate Tax Exemption that is explained below will be subject to estate taxes on the amount of money that exceeds the Estate Tax Exemption.Federal Estate & Gift Tax Exemption
The Federal Estate & Gift Tax Exemptions are indexed for inflation and in 2014 are set at $5.34 million for individuals and $10.68 million for married couples as long as the surviving spouse files an Estate and Generation Skipping Tax Return at the death of their spouse. Taxable Estates at the time of death that exceed the Federal Estate Tax Exemption will be subject to taxes on any amount of the Taxable Estate that exceeds the Federal Estate Tax Exemption at a rate of forty percent (40%). Individual are allowed to give away money each year to however many individuals they want as long as any one gift does not exceed the Annual Gift Tax Exclusion. The Annual Gift Tax Exclusion is an amount determined by the government that is indexed for inflation and cost of living adjustments. The Annual Gift Tax Exclusion for 2014 is $14,000.00. If a gift to an individual exceeds the Annual Gift Tax Exclusion a Gift Tax Return is required to be filed and the amount exceeding the exclusion will be added to your Taxable Estate upon death reducing your avaliable Estate Tax Exemption. If the Gift Tax Exemption is fully utilized during an individual’s lifetime they will be required to pay a Gift Tax at the rate of forty percent (40%) on any additional gifts and will lose the Estate Tax Exemption at the time of death.Generation Skipping Transfer Taxes
The Generation Skipping Transfer Tax Exemption is indexed for inflation and in 2014 are set at $5.34 million and taxed at a rate of forty percent (40%) for individuals and special estate planning will be required to maximize the Exemption between married couples. Generation Skipping Transfer Taxes are imposed on property that is outright gifted or transferred in trust from one generation to a generation that is two or more levels below the generation of the person who is making the transfer or to an unrelated person who is 37.5 years younger than the person making the gift. The Generation Skipping Transfer Tax will be imposed only if the transfer avoids incurring a gift or estate tax at each generation level. Many individuals who might otherwise leave their entire estates outright to their children allocate their generation-skipping exemption to transfers to generation-skipping trusts for the benefit of their children and grandchildren. Such trusts will be funded with cash or property worth up to the available generation-skipping transfer tax exemption. If the term of such a trust is not limited, the trusts are often referred to as dynasty trusts. The purpose of these trusts is to escape all transfer taxes when the children die and allow the property to pass tax-free to the grandchildren and the trusts may be protected from the claims of creditors.