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Estate and Gift Taxes

Pasadena Attorneys at Discuss the Impact on Estate Planning and Trust Administration

Estate and gift taxes can have a huge impact on estate planning and trust administration. Under the American Taxpayer Relief Act of 2012 (ATRA), the federal individual exemption for combined gifts—both gifts during life and bequests at death—was set at $5 million (indexed for inflation). Surviving spouses are permitted to claim any exemption not used by their deceased partner.

Advance Planning Strategies for Large Estates

When a client is faced with large potential estate taxes, there are a number of recourses available to minimize the tax bite. Speak with our estate planning professionals about entities such as split-interest gift trusts, installment sales, fractional interest business entities, qualified personal residence trusts, and life insurance trusts to minimize your estate tax liability.

The Federal Gift Tax

Generally, federal gift tax is owed when an individual has made combined lifetime gifts above the lifetime exemption amount, currently $5.49 million (2017). All gifts over the “annual exclusion” (described below) will count against this lifetime limit. A comprehensive estate plan will include a discussion about how to use the lifetime exemption amount combined with the annual exclusion to achieve the client’s goals.

Annual Gift Tax Exclusion

The annual gift tax exclusion is the amount that can be given by a donor in any one year to any one recipient without impacting the donor’s lifetime gift tax exemption. Currently, the annual exclusion is $14,000. The exclusion applies to the fair market value of the gift when it is made by the donor. A gift under the annual exclusion amount is not 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. Any amount above $28,000 to any one recipient may require a gift tax return to the IRS claiming part of the lifetime exemption amount.

Example: A donor’s gift 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 claim use of the lifetime exemption and establish the value of the gift against a future IRS challenge.

Other exclusions, not subject to the $14,000 annual limit, include direct payments for medical expenses and college tuition.

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. Currently, the federal estate tax exemption amount for each individual is $5.49 million. This amount is reduced by the value of all exempt lifetime gifts. The more exempt gifts made during one’s lifetime, the smaller the estate tax exemption available at death.

Marital Deductions

Gifts to a spouse—whether during one’s lifetime or at death by will or trust—are excluded 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.

Charitable Deductions

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, can set up charitable remainder trusts and family charitable foundations.

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 the 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. Currently, the effective GST exemption is $5.49 million, which will affect only the wealthiest individuals who transfer or distribute assets (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 threshold.

Call Us Today for an Initial Consultation at (626) 683-7234

Primuth, Driskell & Terzian, LLP

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

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