Estate and Gift Tax Planning
Historically speaking, the federal estate tax is an excise 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. Estate taxes have been called the "cruelest tax", or the "volunteer tax," because it is generally avoidable and is a double tax on your wealth. Most people acquire property by purchasing it with money acquired from income which is subject to income tax. Therefore, the estate tax is a tax on previously taxed money. Legal planning to avoid or minimize federal estate taxes is both a prudent and an important aspect of comprehensive estate planning.
The most recent iteration of the federal estate tax was signed into law on December 22, 2017, as part of the Tax Cuts and Jobs Act (TCJA 2017). 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.Federal Estate Tax Exemption
In 2018, the $5.49 million exemption was increased to almost double, $11.18 million, when TCJA 2017 was signed into law on December 22, 2017. The Federal Estate Tax is tied to inflation, and as such became $11.4 Million in 2019, $11.58 Million in 2020, and now $11.7 Million for 2021 (and a nearly "automatic" $23.4 million for married couples who follow very specific requirements at the death of the first spouse).*
The increase in the exemption is set to lapse after 2025. But the Treasury Department and the IRS issued "grandfather" regulations in 2019 allowing the increased exemption to apply to gifts made while it was in effect if Congress lowers the exemption after those gifts.Annual Gift Tax Exclusion and Lifetime Gift Tax Exemption
The TCJA 2017 continues the concept of a unified exemption that ties together the gift tax and the estate tax. This means that for individuals, 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 2021 is $11.7 million, as indexed for inflation up from $11.58 million in 2020. 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 $15,000 for 2021, just as it was for 2018, 2019 and 2020. Married couples can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $30,000 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 are required to file IRS Form 709 Gift Tax return and elect "gift-splitting" for the tax year in which such gift was made.Generation-Skipping Transfer Tax Exemption
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 at $11.7 million, as indexed for inflation up from $11.48 in 2020. 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 transferor.
Properly done, this can transfer significant wealth between generations."Portability"
The American Taxpayer Relief Act of 2012 (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 be unavailable.
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 ATRA 2012, and thereafter, then we encourage you to schedule a consultation.Texas Estate Taxes
Texas's estate tax system is commonly referred to as a "pick up" tax. This is because Texas picks up all or a portion of the credit for state death taxes allowed on the federal estate tax return (federal form 706 or 706NA). Since there is no longer a federal credit for state estate taxes on the federal estate tax return, there is no longer basis for the Texas estate tax. Texas 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.Experienced Estate and Gift Tax Attorneys
One of the important aspects of estate planning is tax planning. Speak with an experienced estate planning attorney about the potential tax liabilities of your estate and what strategies may work best to minimize taxes before you die. We offer free consultations, please call us at (713) 333-8900.
*These numbers are based on 2021 and are subject to change by Congress.