federal gift and estate taxes: tips for choosing the right one
TRANSCRIPT
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
Tips for Choosing the Right One
FEDERAL GIFT AND ESTATE TAXES
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
PROTECTING YOUR HARD EARNED ASSETS
You worked hard all your life, saved on a regular basis, and invested prudently.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
Understandably, you don’t want to see your assets disappear at the last minute because you owe Uncle Sam
a hefty tax bill
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
That could, however, happen to your estate if you fail to plan for the impact federal gift and estate taxes
could have on your estate
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
DO YOU WANT TO GIVE AWAY 40 PERCENT OF YOUR ESTATE?
Are you prepared to lose 40 percent of your estate to taxes?
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
Did you know the federal gift and estate tax rate is permanently set at
40 percent?
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
Is your estate protected against owing gift and estate taxes?
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
If the answer to any of these question is “no” you need to
continue reading
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
WHAT IS THE FEDERAL GIFT AND ESTATE TAX?
A federal tax on the transfer of wealth
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
Potentially imposed on the value of all qualifying lifetime gifts and all
estate assets owned by a taxpayer at the time of death
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
Must be paid prior to assets being transferred out of the estate during
the probate of the estate
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
HOW IS THE FEDERAL GIFT AND ESTATE TAX CALCULATED?
The value of all gifts you made during your lifetime is calculated
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
The value of all assets owned by you at the time of your death is also determined, including real and
personal property as well as tangible and intangible assets.
The two values are added together. The total is the starting point for calculating any federal gift and
estate tax owed by your estate.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
JAMES AND SUSAN – AN EXAMPLE
By way of illustration and to find out how the gift and estate tax works in real life, assume that
James and Susan are married.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
Susan recently died leaving behind an estate valued at $7 million. James also owns separate assets
valued at $6 million.
Susan also made qualifying gifts (with few exceptions, all gifts are “qualifying gifts”) during her
lifetime valued at $2 million
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
For federal gift and estate tax purposes, Susan has a taxable estate of $9 million.
Without any further considerations, Susan’s estate would lose $3.6 million to gift and estate taxes ($9
million x 0.40 = $3.6 million)
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
FACTORING IN THE LIFETIME EXEMPTION
Each taxpayer is entitled to exempt up to the lifetime exemption limit before gift and estate
taxes are levied on the estate.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
Historically, the lifetime exemption limit fluctuated wildly.
The American Taxpayer Relief Act of 2012 (ATRA) permanently set the lifetime exemption limit at $5
million, adjusted annually for inflation.
For 2016, the lifetime exemption limit is $5.45 million.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
SUSAN’S ESTATE AFTER THE LIFETIME EXEMPTION
Susan’s estate is entitled to deduct $5.45 million using the lifetime exemption.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
Susan’s taxable estate is now at $3.55 million
Susan’s estate now owes $1.42 million in gift and estate taxes instead of $3.6 million, a savings of
over $2 million.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
CAN SUSAN USE THE MARITAL DEDUCTION?
The unlimited marital deduction allows a taxpayer to leave an unlimited amount of assets
to a surviving spouse tax-free.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
The deduction only applies if the surviving spouse is an American citizen or permanent resident.
Relying on the marital deduction often results in over-funding the surviving spouse’s estate.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
WHAT HAPPENS IF SUSAN USES THE MARITAL DEDUCTION?
Susan’s estate could use the unlimited marital deduction to transfer all Susan’s assets to James
without incurring any federal gift and estate taxes.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
Susan would still have to use $2 million of her lifetime exemption for the gifts she made during her
lifetime though.
Remember, however, that James also owns separate assets valued at $6 million.
Combined with Susan’s gifts from her unlimited marital deduction, James’s estate is now worth $13
million.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
Using the marital deduction has now over-funded James’s estate, essentially accomplishing nothing more than delaying the impact of gift and estate
taxes.
After deducting his lifetime exemption, James would owe taxes on $7.55 million, leaving a tax
obligation of $3.02 million.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
CAN “PORTABILITY” HELP?
ATRA also made the concept of “portability” a permanent feature of federal gift and estate taxes.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
Portability allows a surviving spouse to make use of any unused
portion of a deceased spouse’s lifetime exemption
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
APPLYING PORTABILITY TO SUSAN’S ESTATE
Because Susan only used $2 million of her lifetime exemption to cover the gifts she made
during his lifetime, the remaining $3.45 million of her lifetime exemption could be “ported” to
James for his use
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
Combined with his own lifetime exemption of $5.45 million, James now has an exemption of $8.9
million.
James’s taxable estate is now reduced to $4.1 million ($13 million - $8.9 million)
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
James’s estate would owe federal gift and estate taxes of $1.64 million instead of $3.02 million.
Since Susan’s estate paid no gift and estate taxes, the couple has paid a total of $1.64 million in
federal gift and estate taxes – money that could have been passed on to beneficiaries or heirs of the estate had they planned ahead and considered the
tax implications of their transfer of wealth.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
WHAT IF SUSAN AND JAMES HAD USED THE ANNUAL EXCLUSION?
Although there are many ways to reduce your estate’s exposure to federal gift and estate taxes,
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
consider how Susan and James could have significantly reduced the amount their estates paid in taxes by taking advantage of the annual
exclusion:
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
Annual exclusion allows a taxpayer to make gifts of up to $14,000 each year to an unlimited number of
beneficiaries -- tax-free.
A married couple may combine gifts using the “gift splitting” option to make gifts of up to $28,000.
Gifts made using the annual exclusion do not count toward your lifetime exemption limit.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
If Susan and James had used the annual exclusion to make gifts to their four children for the ten years prior to Susan’s death, they would have been able to
transfer an additional $1.12 million tax-free.
Their overall taxable estate would have been reduced from $4.1 million to $2.98 million.
Their gift and estate tax bill would have decreased from $1.64 million to $1.192 million, a savings of
almost half a million dollars.
528 College Road Greensboro, NC 27410 ❍ Phone: (336) 547-9999
If you have questions regarding federal estate and gift taxes, or any
other estate planning matters, contact us online or call us at (336)
547-9999 for a free consultation