As you begin to develop your estate plan, it is important to consider the tax implications you may face. Estate tax laws are highly nuanced and constantly changing. For this reason, it is a good idea to consult an experienced New Mexico estate planning lawyer to determine how estate taxes may affect you and to help you develop a strategic plan to minimize possible taxes on your estate. Below is a brief summary of information that you should be aware of regarding estate taxes.
The value of an estate is determined by calculating the fair market value of everything that you own, plus the value of any assets you gave away within three years of your death. For 2009, any estate valued at less than $3.5 million is not subject to the estate tax. This tax-exempt amount changes from year to year. Keep in mind that any amount of money left a spouse who is a U.S. citizen is free of tax (special arrangements can be made to leave money tax-free to a spouse who is not a U.S. citizen).
Estate taxes have slowly been decreasing as the tax exempt amount has been increasing. At one point, the estate tax rate was up to 50 percent; for 2009, the estate tax rate is set at 45 percent. This can be a significant loss for people who want to pass substantial estates to their heirs.
There are several ways to minimize estate taxes, including:
- Make Donations
- Any amount of money donated to a qualified 501(c)(3) charity is free of estate tax.
- Give Gifts
You may gift up to $1 million (cumulative) free of tax in your lifetime before the gift tax is imposed; however, the amount you gift away during your lifetime will reduce the amount of money exempt from estate taxes dollar for dollar. The $1 million dollar limit and direct effect on estate taxes can be avoided by gifting no more than $12,000 to any number of individuals in any given year. Talk to a qualified New Mexico estate planning lawyer to better understand how you can use gifting to reduce estate taxes.
Leave Money to Grandchildren
While there is a generation skipping tax to prevent wealthy families from only having to pay an estate tax every other generation, the first $1 million left to grandchildren is tax-free.
Establish a Trust
Estate taxes may be minimized through irrevocable trusts, like a family trust and irrevocable life insurance trust. If you are married, you may also be able to reduce taxes and take advantage of the federal estate tax exemption by establishing a joint revocable trust.
Guardianship is the legal process of granting another individual the authority to make financial, legal and medical decisions for an incapacitated person; it removes substantial personal rights from an individual who is no longer able to make sound decisions about his or her life, property and assets.
The authority of a guardian is determined by the court; authority may be full or limited depending on the circumstances. A full guardianship grants another individual the power to make all major decisions for an incapacitated person, while a limited guardianship grants another individual power to make certain decisions for an incapacitated person or the authority to make decisions for a limited period of time.
Since guardianship is determined by the court, proceedings can be timely and costly. Additionally, an incapacitated person has no authority to choose who they would like to be their guardian; that is all determined through the court. Guardianship can be avoided by establishing a durable power of attorney or revocable trust before you become disabled or incapacitated (see New Mexico Durable Power of Attorney and Revocable Trusts for more information).