I recently made a presentation to financial industry professionals regarding tax issues for Estate & Trusts gifts. Here is a movie of the slideshow presentation. Have questions? Feel free to contact me!
Youtube video: Estate, Trust & Gift Taxation 2014
Presented by Bette Hochberger, CPA, CGMA
- Estate Tax
- Tax on transferring of property at your death, based on an accounting of everything you own or have interest in
- Gift Tax
- Tax on money or property given to someone
- fiduciary arrangement that allows a third party – trustee – to hold assets on behalf of 1+ beneficiaries
- Income Exclusion
- Certain types of Income set aside as non taxable
- Unified Credit
- tax credit given to each individual, allowing them to gift that amount of assets without gift, estate, or generation-skipping taxes
- Estate consists of an accounting of everything you own or have an interest in
- Fair Market value is used (not cost)
- Total of these items is the gross estate
- Gross estate can consist of cash, securities, real estate, insurance, trusts, annuities, business interest, and other assets.
- Taxable estate is portion subject to taxation: gross estate – deductions
- Deductions may include mortgages and other debts, estate expenses, and property that goes to spouses and charities
- Lifetime taxable gifts is added to estate
- Tax is computed based off this amount
- Tax is reduced by available unified credit
History of Exception – See Chart
Exception was $600,000 and Tax Rate 55% in 1997. It went to $5,000,000 with a 35% Gift and 0% Estate in 2010. It has then gone back to 40%, but up to $5,340,000.
- American Taxpayer Relief Act of 2012 (ATRA 2012) included provisions for estate and gift taxes
- Made permanent transfer tax exclusions of $5 Million, with inflation adjustments
- Highest transfer rate – 40%
- Currently $5.34M for an individual, $10.68M for a couple
- Portability originally enacted with Tax Relief Act of 2010
- Surviving spouse may utilize unused portion of estate tax exclusion from last predeceased spouse
- To qualify, first spouse must die after 2010
- Application Exclusion Amount for Surviving Spouse is Sum of:
- Basic Exclusion Amount
- Aggregate decreased spousal unused exclusion (DSUE) amount.
Estate Tax Scenarios
Spouse 1 dies after 2010 with $2M in assets. Under exclusion ($5.34M), the $2M is not taxable.
Spouse 2’s exclusion is now sum of their exclusion plus remaining from Spouse 1, if Spouse 2 dies in 2010, it’ll be $5.34M + ($5.34M – $2M) = $8.68M
Note: Portability only applies if the executor of their estate filed an estate tax return calculating DSUE and made an election that that amount may be taken into account. Election is irrevocable, but not allowed if not timely filed. Note, 40% of $5.34M amounts to a $2.136M late file penalty.
Further note: Surviving spouse may not use remaining DSUE from prior deceased spouse if they are no longer the last deceased spouse, it’s gone.
Black Widow Scenario
- Scenario: surviving spouse makes gifts between the death of two spouses, each of whom is the last deceased spouse.
- Ordering rule: DSUE of last deceased spouse is used before their own exclusion
- They are allowed to use DSUE of multiple “last deceased spouse” – but they cannot use the sum
- Can use spouse 1’s exclusion for gifts before spouse 2 dies. Once spouse 2 dies, and DSUE from spouse 1 is gone, but they can use DSUE from spouse 2.