Estate Planning & Taxes - The Basics

Tax considerations in estate planning are extremely complex and difficult. Following is a very brief overview of the basics of these topics, but the overview is not all-inclusive. We hope that this basic review of tax considerations in estate planning will give you a basic understanding of these concepts to better prepare you to discuss them with our estate planning attorneys.

What is the Estate Tax?

The Estate Tax is generally described as a tax on the transfer of wealth from one generation to another at the death of the transferor. In simpler terms, the estate tax is a tax on the fair market value of the assets that someone leaves at the time of their death.

What is a Gift Tax?

The Gift Tax is like the estate tax in that it is a tax on the transfer of wealth from one generation to another when the transfer is made during the lifetime of the transferor. More simply, the gift tax is a tax on any gifts that a person makes during their lifetime.

How the Estate Tax Works

The Estate Tax is not the same as income tax. While the income tax is a tax imposed on any income that you generate during your lifetime, the Estate Tax is a tax imposed on the total value of the assets that you own at the time of death. For purposes of calculating the estate tax, all of your assets are counted, including cash, stocks, cars, life insurance, real estate, retirement plans, etc.

Estate Tax Exemption – Everyone Qualifies

Every individual in the U.S. qualifies for an estate tax exemption, which is currently $11.4 million per individual, up from $11.18 million the previous year, and $22.8 million per married couple for 2019.  The exemption, significantly increased thanks to the Tax Cuts and Jobs Act, means that the first $11.4 million of assets in an individual's estate is exempt from paying estate taxes.

Portability of Estate Tax Exemption

A law passed in 2013 made the concept of "portability" permanent.  Portability allows married couples to use any portion of their spouse's unused exemption amount upon the first spouse's death. With the $22.8 estate tax exemption for married couples in 2019, if the husband dies first, but only has separate assets of $3 million, the wife could potentially pass $19.8 million tax-free.

The Gift Tax Exemptions

The Gift Tax is computed much in the same way that the Estate Tax is computed. The tax is calculated based on the fair market value of the property given away in each year. Each individual in the U.S. qualifies for a $11.4 million exemption from gift taxes, which means that the first $11.4 million of taxable gifts that a person gives away is exempt from gift tax.  However, this would eliminate any ability to transfer assets tax-free upon that individual's death, as the Gift and Estate Tax exemption are now a combined $11.4 million.

The Annual Gift Tax Exclusion

In addition to the $11.4 million combined estate and gift tax exemption, every individual in the U.S. has the ability to give away $15,000 each year to as many individuals as the individual chooses without paying gift taxes. This annual gift amount is known as the “annual gift tax exclusion” because these gifts can be made every year, and they are excluded from gift taxes.

Utilization of the annual gift tax exclusion in an Annual Gifting Program is a very popular mechanism of removing assets from the estates of individuals who might be required to pay estate taxes upon their deaths. 

Planning with Estate & Gift Tax Considerations

Estate and Gift tax considerations drive most estate planning decisions. The overwhelming goal behind an estate plan relates to reducing estate and gift taxes so that the maximum assets can be passed tax free to future generations of a family.

Contact an Estate Planning Attorney

Because the Estate and Gift Tax concepts are extremely complex, it is important that you seek qualified advice before making your estate planning decisions. The attorneys at Ford+Bergner LLP routinely counsel their clients on these issues, and we will be glad to assist you. Contact us now.