Estate and Gift Tax Considerations

Recent Changes to Estate and Gift  Taxation

The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013, and made permanent earlier changes to the estate tax, generation-skipping tax and income tax laws, as well as additional changes to the law.  Under this legislation, the federal estate tax became a flat 40% of the amount by which the adjusted gross estate exceeds the amount sheltered by the Federal estate and gift tax “unified credit.”  The payment of this tax is due within nine months after the date of death, which may cause liquidity problems without sufficient advance planning. 

For the year 2017, the Federal estate and gift tax “unified credit” shelters up to $5,490,000 of taxable assets, an amount known as the Federal Applicable Exclusion.  Hence, for 2017, the tax paid by an estate will be 40% of the amount by which the adjusted gross estate exceeds $5,490,000, less any portion of the credit used to shelter lifetime gifts. 

Also significant in the new legislation is that the unified credit became “portable” between spouses, so that married couples could add any unused portion of the estate tax exemption of the first spouse to die to the surviving spouse’s estate tax exemption. Hence, married couples can now pass $10,980,000 on to their heirs free from estate taxes, and without using credit shelter trusts.

It also noteworthy that individuals may presently gift up to $14,000 per person, per year, without filing a gift tax return (unlimited gifts can be made to a spouse who is a U.S. citizen without filing a gift tax return).  For gifts over $14,000 per person per year, the donor would have to file a gift tax return, but could use a portion of his or her lifetime unified estate and gift tax credit, thus paying no gift taxes for the first $5,490,000 in reportable lifetime gifts – this is a sharp increase from the $1,000,000 that could be gifted tax free prior to 2011.  However, any amount of the credit used for lifetime gifts would, of course, result in a corresponding reduction in the credit available to shelter estate taxes.

It is also significant that, as of February 1, 2001, the New York State estate tax credit increased to shelter $1,000,000 of estate assets however, New York then “de-coupled” from further Federal estate tax reductions, and thus, only $1,000,000 was exempt from New York State estate taxes.  New York as since increased the estate tax exemption, so that individuals dying after April 1, 2014 have an exemption of $2,062,500.  This increases each year, so that individuals dying after April 1, 2015 have an exemption of $3,125,000; individuals dying after April 1, 2016 have an exemption of $4,187,500; individuals dying after April 1, 2017 have an exemption of $5,250,000; and individuals dying after January 1, 2019, will have the same exemption as the Federal government allows, projected to be $5,900,000 in 2019.

At this time, the maximum New York State estate tax rate is 16% (for estates exceeding $10 million).  However, the maximum Federal and New York State combined estate tax marginal rate (after credit or deduction) is 49.60% for 2017. 

Additionally, it must be noted that with new legislation in 2011, the Federal estate and gift tax “unified credit” once again became truly “unified.”  Between 2004 and 2010, the Federal gift tax credit sheltered only $1,000,000 in lifetime transfers (while larger amounts were sheltered from estate taxes), but as of January 1, 2017, an individual can transfer $5,490,000 tax free, either through lifetime gifts or though his or her estate.

The assets that make up the “gross taxable estate” include virtually any asset over which you had any control at the end of your life, including life insurance proceeds, retirement vehicles (IRA, 401k, 403b, SEP, etc.) as well as the value of a home, all of which combined may exceed the amount sheltered by the unified credit.  It is important to remember to take these assets into account when contemplating estate planning options.  When assets exceed these amounts, you should consider some of the available tax planning methods to reduce potential taxes.

Please call the Law Offices of Todd Gustafson, Esq., at 585-230-6298 with any questions, or to schedule a free initial consultation. Just ask for Todd.