TAXES PAYABLE AT YOUR DEATH
By: Laurie Valentine- COO & Trust Counsel
Estate planning is an important part of every Christian’s stewardship responsibilities. A Christian estate plan is one that you develop by determining God’s will for (1) how your assets should be distributed at your death and (2) how your affairs would be managed in the event you become incapacitated during your lifetime.
This lesson provides information about death taxes and how to plan to reduce, defer and/or eliminate the taxes that may be payable at your death.
Scripture References: Matthew 22:15-22.
Please read this passage in your Bible now.
What Taxes May Be Payable At My Death?
If you die a resident of Kentucky there are two potential death taxes that may be due—the Kentucky Inheritance Tax and the Federal Estate Tax.
What is the Kentucky Inheritance Tax?
The Kentucky inheritance tax is a death tax that may be owed to the Commonwealth of Kentucky by some of your beneficiaries if you die a resident of the Commonwealth. It taxes the beneficiary on the value of what he or she inherits from you.
The Kentucky Inheritance Tax rates range from 4% to 16%.
Assets that must be reported on the Kentucky Inheritance Tax return include individually-owned and jointly-owned bank accounts, stocks, bonds, mutual fund shares, business interests, real estate and real estate interests, debts owed to the deceased person, household goods and personal effects, automobiles; life insurance payable to your estate; interests in trusts; and the value of gifts you made within 3 years of your death.
The portion of a beneficiary’s inheritance that is exempt from taxation depends on their relationship to the deceased person. Your spouse, parents, children, grandchildren, brothers and sisters, and qualified charities are 100% exempt from Kentucky Inheritance Tax, no matter how much they inherit from you. The first $1,000 of what a niece, nephew, daughter-in-law, son-in-law, aunt, uncle, or great-grandchild inherits from you is exempt. All persons not specifically listed in the previous two sentences are granted an exemption on only the first $500 of their inheritance.
What is the Federal Estate Tax?
The federal estate tax is a tax imposed on the transfer of the “taxable estate” of any deceased person who is a citizen or resident of the United States. Your “taxable estate” is the value of your “gross estate” less all allowable deductions and plus the amount of your “adjusted taxable gifts.”
Your “gross estate” consists of all assets, property and interests in property that you own or own an interest in at the time of your death. That includes individually-owned and jointly-owned bank accounts, stocks, bonds, mutual fund shares, business interests, real estate and real estate interests, debts owed to you, household goods and personal effects, automobiles, life insurance, qualified retirement plan survivor benefits, and individual retirement accounts.
Your “adjusted taxable gifts” are the total amount of gifts you made after 1976, other than those qualifying for the gift tax annual exclusion, the exclusion for payment of tuition and medical expenses, the marital deduction or charitable deduction.
Deductions allowable on the federal estate tax return include the unlimited marital deduction and the unlimited charitable deduction.
The unlimited marital deduction provides your estate with a deduction equal to the value of all assets and interests in property that pass from you to your surviving spouse as a result of your death. The deduction is “unlimited” in that there is no limit on the amount that can be deducted—no matter whether the value of what is passing to your spouse is $1,000, $100,000, $1,000,000 or $10,000,000.
The unlimited charitable deduction provides your estate with a deduction equal to the value of all assets and interests in property that pass from you to a qualified charity such as your church, association or one of our Kentucky Baptist or Southern Baptist agencies or institutions at your death. The deduction is “unlimited” in that there is no limit on the amount that can be deducted.
The federal estate tax rate is 35% for persons dying in 2012.
An estate tax credit known as the unified credit amount shelters the transfer of the first $5,120,000 of estate value for persons dying in 2012. Therefore, if the value of your taxable estate is equal to or less than the unified credit amount, your estate will owe no federal estate taxes no matter who receives your assets at your death.
To estimate your federal estate taxes use the following worksheet:
Remember tax evasion is illegal, but tax avoidance is good stewardship.
Prayer Focus: Take time now to pray for God’s guidance in developing a plan of estate distribution that will result in your being a good steward of the financial resources with which God has so richly blessed you.
Next Week: Budgeting Basics for Today’s Christian Adult
The information in this article is provided as general information and is not intended as legal or tax advice. For advice and assistance in specific cases, you should seek the advice of an attorney or other professional adviser.