Tax Reform: What it Means For Individuals – Estate and Gift Tax
September 12, 2018

This week, we summarize changes made to the estate and gift tax.

 

Background

The US has a unified gift and estate tax system. This means gifts made during your lifetime are treated similarly to transfers upon death. Each time you apply the lifetime exemption to gift taxes, the amount is deducted from what is available to shelter your estate from estate taxes when you die.

Gift tax is a tax on the transfer of property during your lifetime. If during the year gifts were given to someone in excess of the annual exclusion, Form 709 should be filed by the following April 15th to calculate the gift tax liability. Even if you make a taxable gift, you will not have to write a check to pay tax until your lifetime exclusion has been used.

The estate tax is a tax on your right to transfer property at your death. The total fair market value (FMV) of all assets you own or have certain interest in at your date of death is your gross estate.

If a decedent was a US citizen whose gross estate is above the basic exclusion amount the executor of the estate must file Form 706 within 9 months from the date of death to determine if tax is due.

Before calculating tax on your estate, the value of lifetime taxable gifts is added back to your gross estate less allowable deductions when you die.

In general, the basis of assets transferred after death is “stepped-up” to the FMV on the date of death. The recipient of a gift made during your lifetime must take your basis in the property. Note, this will likely yield a significantly different result if and when the recipient eventually sells the inherited/gifted asset.

New Estate Tax Exclusion Amount

For decedents who die after 2017 and before 2026, the basic exclusion amount for federal estate and gift taxes doubled. The exclusion will be adjusted annually for inflation. The 2018 exclusion amount is $11,180,000 per person.

A married couple using portability may exclude $22,360,000 of assets in 2018. Portability is the transfer of a deceased spouse’s unused exclusion. Portability is an election the executor of the estate makes on a timely filed Form 706.

Gift Tax Exclusion Amount

Beginning in 2018, the annual exclusion amount is $15,000 per recipient per year. Gifts made to spouses or charitable organizations are exempt from being reported to the IRS.

Estate and Gift Tax Rates

The top marginal tax rate decreased from 55% in 2001 to 35% in 2010 before increasing to 40% in 2013. Tax reform in 2017 did not change the estate and gift tax rates.

Opportunities

Due to these changes being temporary, the next several years present various planning opportunities. A carefully planned gift-giving program can reduce the amount of your estate that is subject to tax and maximize wealth for your loved ones. Outside of meeting an immediate financial need of the recipient, an advantage to making large gifts during your lifetime is to remove future appreciation from your taxable estate.

Remember, the payment of medical and education expenses made directly to the medical service provider or educational institution do not count against the annual exclusion. You can pay an unlimited amount for these expenses so long as they are not reimbursed by insurance.

 

Have questions about how these changes may impact your estate plan? Give BMM a call. Next week, we begin our analysis of tax changes impacting businesses.