Federal Estate Taxes and Lifetime Exemption

For 2021 you can leave bequests (gifts to other individuals upon your death) worth up to $11,700,000 free of any federal estate tax.

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Estate taxes were repealed for the tax year 2010, but was resurrected beginning January 1, 2011.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 2020. 

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 2021, the annual gift tax exclusion is $15,000 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 $30,000 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 $11,700,000 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. 

Any individual who does make a gift in excess of the $15,000 allowance ($30,000 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.

Generational Skipping Tax

ATRA, the generation-skipping exemption for decedents dying after 2020 and the federal estate tax exemption has been indexed for inflation and therefore increased to $11,580,000 for 2020.  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 $11,700,000 exemption for 2021and $11,580,000 for 2020. 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.