Estate and Gift Tax Applicable Exclusion:
The amount that can be passed free of federal tax. Whatever amount is used during lifetime is no longer available for use to pass assets at death. The Estate and Gift Tax Applicable Exclusion is currently $12.92 million.
Annual Gift Tax Exclusion:
The amount that can be given to each person you want without using any Applicable Exclusion. The Annual Gift Tax Exclusion is currently $17,000.
Generation-Skipping Tax Exemption:
This allows for giving to people who are grandchildren or other “skip persons.” It may also be used as a sophisticated way of avoiding Federal estate tax at the death of a child. Each person currently has $12.92 million of Generation-Skipping Tax Exemption.
State Estate Tax:
In addition to the Federal Estate Tax, many states have a State Estate or Inheritance Tax. State Estate and Inheritance Tax may apply at a much lower level than the federal tax. It may apply when a person dies when resident in or owning property in any of the many states with such a tax.
Gift and Estate Tax Basics
Creating a successful estate plan includes considering more than just the division of your estate assets when you are gone. Protecting those assets up to the point when they are passed down to loved ones, for example, should be a primary estate planning objective in every estate plan. That requires you to understand how the assets you own could be threatened. Gift and estate taxes, for example, could dramatically reduce the value of your estate assets if you fail to understand and plan for the impact taxes could have on your estate at the time of your death. To help you protect your assets, the Coral Gables estate planning attorneys at Stivers Law explain the basics of gift and estate taxes and how to avoid incurring the tax.
Federal Gift and Estate Tax Basics
The federal gift and estate tax is a tax on the transfer of wealth that is collected from the estate of a taxpayer when the taxpayer’s estate goes through probate after death. Every taxpayer is potentially subject to federal gift and estate taxes. Moreover, the tax applies to all qualifying gifts (almost all gifts are considered “qualifying” gifts) made during a taxpayer’s lifetime as well as all estate assets owned by the taxpayer at the time of death. To illustrate how the tax works, imagine you made gifts during your lifetime totaling $4 million in value. Your estate, at the time of your death, was valued at an additional $5 million. The combined total of $9 million would be subject to federal gift and estate taxes. Historically, the federal gift and estate tax rate fluctuated on a regular basis. The American Taxpayer Relief Act of 2012 (ATRA), however, permanently set the rate at 40 percent. Without any deductions or adjustments, that $8 million estate would owe $3.6 million in federal gift and estate taxes to Uncle Sam.
State Gift and Estate Taxes
Some states also impose a state level gift and estate tax. Fortunately for Florida residents, the State of Florida is not one of the state’s that has a state gift and estate tax; however, if you own property in another state you should check to see if your property will be subject to a state tax in that state.
Understanding the Lifetime Exemption
Each taxpayer’s estate has always been entitled to use the lifetime exemption when determining whether the estate owes gift and estate taxes. Although the exemption amount also fluctuated in the past, ATRA set the lifetime exemption amount at $5 million, to be adjusted annually for inflation. In 2018, however, President Trump signed tax legislation into law that changed the lifetime exemption amount for 2018 and for several years thereafter. These exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation. For 2022, the individual lifetime exemption amount is $12.06 million for an individual.
How Does “Portability” Impact Federal Gift and Estate Taxes?
Like the lifetime exemption, the concept of portability has been around for some time. The ATRA also incorporated portability into law. Portability refers to a surviving spouse’s ability to use any unused portion of a deceased spouse’s lifetime exemption. Using our $9 million estate from above, assume that you passed away in 2022 and that you were married at the time of your death. Your estate would need to use $9 million of your $12.06 million exemption. The remaining $3.06 million would “port” over to your spouse. Your spouse would then have a $15.12 million exemption (your $3.06 million plus your spouse’s $12.06 million = $15.12 million) available upon his/her death.
Contact Coral Gables Estate Planning Attorneys
For more information, please join us for an upcoming FREE webinar. If you have additional questions or concerns about how gift and estate taxes could impact your estate or how to incorporate tax avoidance strategies into your estate plan, contact the experienced Coral Gables estate planning attorneys at Stivers Law by calling (305) 456-3255 to schedule an appointment.