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Estate Tax, Gift Tax, Exclusions :: Knowledge Center :: THE RETIREMENT SOURCE®
Estate Tax, Gift Tax, Exclusions

Federal Estate Taxes and Lifetime Exemption

For 2016 you can leave bequests (gifts to other individuals upon your death) worth up to $5,450,000 free of any federal estate tax.

Federal Estate Taxes and Lifetime Exemption
YEAR LIFETIME
EXEMPTION
TOP TAX
RATE
2010 $5,000,000 35%
2011 $5,000,000 35%
2012 $5,000,000 35%
2013 $5,250,000 35%
2014 $5,340,000 40%
2015 $5,430,000 40%
2016 $5,450,000 40%

 

Estate taxes

Estate taxes were repealed for the tax year 2010, but was resurrected beginning January 1, 2011. The federal estate tax is collected on the transfer of a person’s assets to his or her benefactors after death. The tax due is calculated by adding up the fair market values of all of the decedent’s assets upon his/her death. Then estate tax credits are applied and estate tax deductions are subtracted. The exclusions are in the table above for the top tax rates. These rates are effective through 2016. 

Gift Tax
YEAR ANNUAL GIFT
EXCLUSION
LIFETIME GIFT
TAX EXEMPTION
2009 $12,000 $3,500,000
2010 $13,000 $1,000,000
2011 $13,000 $5,000,000
2012 $13,000 $5,120,000
2013 $14,000 $5,250,000
2014 $14,000 $5,340,000
2015 $14,000 $5,340,000
2016 $14,000 $5,450,000

 

Gift taxes

Gift taxes are one of the least understood and most underused of the asset transfer planning tools. Gift taxes could be required if you give someone money or property during your life. However, for most people, it is not an issue. Many people believe that their gifting needs to be restricted to the annual gift tax exclusion amount that can be given to each recipient by a taxpayer in any one year. For 2016, the annual gift tax exclusion is $14,000 you may give per person without having to consider federal gift tax consequences. A married couple can combine their gifting to double that amount to $28,000 per recipient.

What people fail to understand is that each person can make total gifts above the annual gifting allowance in any amount without federal gift taxes up to a total of $5,450,000 during their lifetime. That is sufficient to avoid worry for most people. Gifts above the annual gift allowance must be used to reduce the lifetime estate tax exemption. For example, you can give up to the annual exclusion amount ($14,000 in 2016) to any number of people every year, without thinking about gift taxes. Recipients never owe income tax on the gifts. If an individual gives more than the annual exclusion amount ($14,000 in 2016) for instance $14,000 to 5 people he would use up $70,000 of your $5,450,000 lifetime exclusion.

Any individual who does make a gift in excess of the $14,000 allowance ($28,000 for a married couple) should file a simple Form 709 to record the gifting. No taxes will be due, but it is wise to record it. This could be important in federal estate tax considerations later if Congress materially reduces the lifetime exemption and gifting allowances. Making such tax-free lifetime transfers can significantly reduce headaches of estate transfers and can greatly expand the range of family problem solving strategies.

Estate and Gift Tax
ESTATE TAX   GIFT TAX
  HIGHEST RATE EXEMPTION HIGHEST RATE EXEMPTION
2015 50% $5,430,000 40% $5,430,000
2016 50% $5,430,000 40% $5,450,000

 

Generational Skipping Tax

ATRA, the generation-skipping exemption for decedents dying after 2012 and the federal estate tax exemption has been indexed for inflation and therefore increased to $5,340,000 for 2014 and $5,430,000 for 2015.  Gifts you make during your life or bequests from your estate can also be subject to the generation-skipping transfer (GST) tax, if the gifts or bequests are to a person, such as a grandchild, who is more than one generation younger than you

People can give property directly to their grandchildren and keep the property out of their children's taxable estates. Because of this Congress enacted the generation-skipping tax on lifetime or death gifts which skip a generation. There is a $5,450,000 exemption for 2016 and $5,430,000 for 2015. Married couples can treat a transfer as made one-half by each spouse. In effect, this doubles the exemption. Over the exempt amount the rate of tax is at the maximum estate and gift tax rate. Additionally, often gifts that would qualify for the annual exclusion under the gift tax are not subject to the generation-skipping transfer tax. There are additional rules for getting this exemption when the gift is made to a trust. The tax is in addition to the estate tax.

The tax applies to any transfer from a "transferor" to a "skip" person. It is best to remain flexible in all of your long-range estate planning as the rate structure can change in future years. Anytime you are considering any planning that involves potential estate, gift or generation skipping taxes, you need to engage expert legal counsel.

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