Historically speaking, the federal estate tax is a tax levied on the transfer of a person's assets after death. In actuality, it is neither a death tax nor an inheritance tax, but more accurately a transfer tax. There are three distinct aspects to federal estate taxes that comprise what is called the Unified Transfer Tax: Estate Taxes, Gift Taxes, and Generation-Skipping Transfer Taxes. Legal planning to avoid or minimize federal estate taxes is both a prudent and an important aspect of comprehensive estate planning. Of course, we can help you with this type of planning.
The most recent version of the federal estate tax was signed into law on January 2, 2013, as part of the American Taxpayer Relief Act of 2012 (ATRA 2012). There are a few things you ought to know about this law, as regarding your estate planning. Specifically, you should know the "numbers" governing transfers subject to estate, gift and generation-skipping transfer taxation.
The $5 million exemption signed into law on December 17, 2010, under the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (TRA 2010), is now permanent under ATRA 2012. This adjusts for inflation so the federal estate tax exemption for 2013 was $5.25 million, 2014 was $5.34M, 2015 was $5.43M, 2016 was $5.45M, and 2017 is $5.49M, thanks to that inflation adjustment. That means for 2017, a married couple can shelter almost $11M with some very specific planning strategies. We can assist you with those strategies. Also, see the discussion below about "Portability."
The ATRA 2012 continues the concept of a unified exemption that ties together the gift tax and the estate tax. This means that, to the extent you utilize your lifetime gift tax exemption while living, your federal estate tax exemption at death will be reduced accordingly. Your unified lifetime gift and estate tax exemption in 2017 is $5.49 million, as indexed for inflation; up from $5.45 million in 2016. Likewise, the top tax rate is 40%. Note: Gifts made within your annual gift exclusion amount do not count against your unified lifetime gift and estate tax exemption.
The annual gift exclusion is currently $14,000 for 2017, just as it was for 2013, 2014, 2015, and 2016. Married couples can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $28,000 to as many individuals as they choose each year, whether both spouses contribute equally, or if the entire gift comes from one spouse. In the latter instance, the couple must file an IRS Form 709 Gift Tax return and elect "gift-splitting" for the tax year in which such gift was made.
The amount that can escape federal estate taxation between generations, otherwise known as the Generation-Skipping Transfer Tax Exemption (GSTT), is unified with the federal estate tax exemption and the lifetime gift tax exemption. The rate for 2017 is $5.49 million, as indexed for inflation, up from $5.45 in 2016. As with estate and gift taxes, the top tax rate is 40%.
So, what is this GSTT? Basically, it is a transfer tax on property passing from one generation to another generation that is two or more generational levels below the transferring generation. For instance, a transfer from a grandparent to a grandchild or from an individual to another unrelated individual who is more than 37.5 years younger than the person transferring the funds.
Properly done, this can transfer significant wealth between generations.
The ATRA 2012, makes "permanent" a new concept in estate planning for married couples, ostensibly rendering traditional estate tax planning unnecessary. This concept, called "portability," means that a surviving spouse can essentially inherit the estate tax exemption of the deceased spouse without use of "A-B Trust" planning. As with most tax laws, however, the devil is in the details. For example, unless the surviving spouse files a timely (within nine months of death) Form 709 Estate Tax Return and complies with other requirements, the portability may not be available. In my opinion, because of the frequent occurrences of the surviving spouse not making their election in a timely manner and not following the other requirements, it is usually better to keep the old-style A-B Trusts in place, at least until after the first death.
In addition, married couples will not be able to use the GSTT exemptions of both spouses if they elect to use "portability" as the means to secure their respective estate tax exemptions. Furthermore, reliance on "portability" in the context of blended families may result in unintentional disinheritances and other unpleasant consequences.
If you are concerned about how your current estate and gift planning may function in light of the changes under ATRA 2012, then we encourage you to schedule a consultation.
Florida has neither an Estate Tax (a tax paid by the estate) nor an Inheritance Tax (a tax paid by a recipient of a gift from an estate). However, due to a wrinkle in the law repealing the prior Florida Estate Tax, the estate representative still needs to file an "Affidavit of No Florida Estate Tax Due," whether or not Federal Estate Taxes are due. This is necessary to release the automatic Florida Estate Tax lien. Think of it as this: even though the Wicked Witch is dead, we still need to pay her our respects. Or else.
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