We believe the results of Estate Planning should be as follows:
1. Giving WHAT you have, to WHOM you want, WHEN you want, and under your TERMS and CONDITIONS.
2. Eradicate exposure to DIVORCE, LAWSUIT, and TRANSFER TAXES on your wealth INDEFINITELY.
3. Provide you with a satisfactory stream of INCOME and CONTROL.
General knowledge about Estate Planning
The federal government imposes taxes on gratuitous transfers of property made during lifetime (gifts) or at death (bequests/devises) that exceed certain exemption limits. Gift taxes are imposed on transfers during lifetime that exceed the exemption limits, and estate taxes are imposed on transfers at death that exceed the exemption limits. The generation-skipping transfer (GST) tax is imposed on transfers to grandchildren and more remote descendants that exceed the exemption limits so transferors cannot avoid transfer taxes on the next generation by "skipping" a generation. The GST tax is levied in addition to gift or estate taxes and is not a substitute for them.
The gift, estate, and GST tax exemptions were $5 million in 2011. The exemptions are indexed for inflation, resulting in exemptions of $5.12 million for 2012, $5.25 million for 2013, $5.34 million for 2014, $5.43 million for 2015, $5.45 million for 2016 and $5.49 million for 2017. An individual can transfer property with value up to the exemption amount either during lifetime or at death without paying any transfer tax. In other words, any portion of the exemption used during lifetime reduces the amount of exemption available at death for estate tax purposes. For example, if you made a lifetime taxable gift of $5 million in 2017, your remaining exemption amount that could be used by your estate at your death would be $6.18 million ($11.18 million 2018 inflation adjusted exemption, less the $5 million lifetime gift). The GST exemption essentially allows the earmarking of transfers, made during lifetime or at death, that either skip a generation or are made in trust for multiple generations. Certain gifts are not applied toward the exemption, such as “annual exclusion” gifts and direct payments to medical or education providers, and can be made completely tax-free.
Transfers between spouses and to certain trusts for spouses, made during lifetime or at death, may be made without the imposition of any tax. These transfers also do not use any exemption. This is known as the “unlimited marital deduction.”
The $10 million inflation adjusted estate tax exemption is "portable" between spouses beginning 2011 so that a surviving spouse may take advantage of a deceased spouse's unused exemption (DSUE) through lifetime gifts by the surviving spouse, or at the surviving spouse's later death.
This means that prior to 2026 no transfer tax is assessed on estates up to $11.18 million for individuals and $22.36 million for married couples, assuming no lifetime gifts other than annual exclusion gifts or certain transfers for educational or medical expenses were previously made.
It is important to note that there was no inflation indexing of the transfer tax exemption prior to 2012. Given the large $10 million base amount that is indexed, the annual increases in the exemption amounts are likely to be substantial, even when inflation is not particularly high. This will create new planning opportunities. First, for taxpayers who fully use their exemption in any given year, there will be a significant new exemption available the next year. Second, for the first time, the growth in the exemptions will enable taxpayers whose estates grow to remain protected from the imposition of transfer tax.
With the new high exemptions, most people will no longer be subject to the federal estate tax, but this fact should not be interpreted to mean that planning is not necessary. Federal estate, gift and GST taxes are but one component of the myriad of issues addressed in the estate planning process. In addition, many states now impose state estate tax, and the state estate tax exemption, if any, may be much lower than the federal exemption. The most common state estate taxes are based on a specified percentage of the federal estate tax. Some states impose an inheritance tax tied to the family relationship between the decedent and the recipient of property from the estate.
Only Connecticut and Minnesota currently impose a state gift tax. This means that residents of any state, other than Connecticut and Minnesota, that imposes a state estate tax, may be able to significantly reduce or even eliminate their state estate tax at death by making gift transfers during their lifetimes. These taxes can be particularly complex or apply in unexpected ways. In addition, the determination as to which state may tax a particular taxpayer or tax property located within that state regardless of where the taxpayer resides is complex. Accordingly, this type of planning should be pursued only with professional guidance.
* The Minnesota gift tax was repealed in 2014.
* Material above was provided by American Bar Association
This site is provided as a public service by the ABA Section of Real Property, Trust and Estate Law. While the information on this site is about legal issues, it is not legal advice or legal representation. Because of the rapidly changing nature of the law and our reliance upon outside sources, we make no warranty or guarantee of the accuracy or reliability of information contained herein.
Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.