Estate and Gift Taxes


Properly advising a client on estate and gift taxes can be an extremely important part of estate planning and trust administration. Under the American Taxpayer Relief Act of 2012 (ATRA), Congress revised the effective individual exemption for combined gifts, both gifts during life and bequests at death, to $5.43 million and allowed a surviving spouse to claim any exemption not used by their deceased partner. It also raised the estate and gift tax rate to 40 percent, 5 percentage points higher than previously years.

The estate tax has constantly changed over the past dozen years, but with ATRA it looks we finally have stable tax regime for planning.

All but the largest estates will now pass to heirs tax-free. Nearly 99.9 percent of estates are exempt from estate taxes. Experts estimate that only one in 700 estates will owe any estate taxes under the new law.

To avoid the estate tax danger zone, it is important to design one’s living trust and retirement account beneficiary designations to fully utilize the available estate tax exemptions.

The Federal Gift Tax

Generally, federal gift tax is owed when an individual has made combined lifetime gifts above the lifetime gift tax exemption amount of $5.43 million. All gifts over the “annual exclusion” (described below) will count against this 5.43 million lifetime gift tax exemption. The value of countable lifetime gifts is subtracted from the federal estate tax exemption, gift tax and estate tax planning go hand-and-hand and should be discussed as part of a comprehensive estate planning process.

Annual gift tax exclusion amount

The annual gift tax exclusion is the amount that can be given away by a donor in any one year to any one recipient without using the donor’s lifetime gift tax exemption; gifts under this annual exclusion amount don’t “count” for gift tax purposes. For 2015, the annual exclusion is $14,000. This amount applies per recipient. F0r 2015, a donor may gift $14,000 without using any of his or her $5.43 million lifetime gift tax exemption. The exclusion applies to the fair market value of the gift at the time of the gift. An annual gift at or below $14,000 does not have to be reported to the IRS. A married couple gifting community property may combine their annual exclusions, for a total annual exclusion of up to $28,000 per recipient. Other exclusions, which are not subject to the $14,000 annual limit, can be used for direct payments for medical expenses and college tuition.

Example: a donor’s gift (or gifts) valued at $100,000 in a single year to a single individual exceeds the $14,000 annual exclusion amount by $86,000 and must be reported to the IRS on a gift tax return. Even though no gift tax is owed on the $86,000 gift, tax reporting is required to establish the lifetime exemption and establish the value of the gift against future IRS challenge.

All substantial gifts should be checked against the annual exclusion and lifetime gift tax exemption rules. The lifetime exemption is cumulative, so care should be taken to track how much a donor has used.

Back To Top

Federal Estate Tax Exemption

The federal estate tax exemption is the amount of assets that one can transfer tax free at his or her death. For 2015, the federal estate tax exemption amount for each individual is $5.43 million. This amount is reduced by the value of all exempt lifetime gifts. The more exempt gifts one makes during life, the less estate tax exemption he or she has at death.

Back To Top

Marital deduction

Gifts to a spouse—whether during lifetime or at death by will or trust—are not counted when calculating estate taxes; the value of these gifts is “deducted” from the donor’s gross estate and his or her estate pays no tax on them.

Back To Top

Charitable deduction

Gifts to charities, educational institutions and religious organizations and institutions are deducted from an individual’s gross estate for estate tax purposes. Utilizing these deductions is an excellent way to reduce the value of an estate below the taxable threshold. Individuals and couples facing significant estate taxes, often because of highly appreciated property, sometimes set up charitable remainder trusts to provide income to them during life, while allowing them to deduct the appreciated, fair market value of the “remainder” gift that passes to the charity at their death, thereby minimizing both capital gains and estate taxes.

Back To Top

Generation-skipping tax (GST)

A third type of transfer tax, the generation-skipping tax targets gift transfers to grandchildren and other individuals more than one generation below the donor. The tax is imposed at the time of a distribution or transfer from the donor or their trust to the recipient. Like the gift tax, each individual has a lifetime GST exemption to shield a certain amount of assets from the tax. For 2015, the effective GST exemption is $5.43 million, which will touch only the wealthiest individuals who transfer or distribute (directly or in trust) to their grandchildren. Because complications can arise when designing trusts with grandchildren as beneficiaries, understanding how to allocate the donor’s GST exemption is an important part of the estate planning process for estates in the taxable “danger zone.”

Back To Top

Primuth & Driskell, LLP 790 East Colorado Blvd. Suite 300 Pasadena, CA 91101 Phone: (626) 683-7234 Fax: (626) 683-7251

Primuth & Driskell, LLP serves clients throughout Pasadena, La Canada Flintridge, South Pasadena, San Marino, Arcadia, Alhambra & Los Angeles.

Disclaimer: The estate planning or other legal information presented in this site should not be considered legal advice and does not create an attorney client relationship.

Copyright © 2017 Primuth & Driskell, LLP - All rights reserved.

Website Design, SEO and Legal Internet Marketing by: SLS Consulting | Sitemap