Amy & Dan Smith's Planning for Life: Gift and Estate Tax: Where Are We Now?

Changes in the tax law have created some confusion regarding the current state of taxes associated with the transfer of assets both at death (estate tax) or during lifetime (gift tax). A brief summary of the current tax law may be helpful to some of our readers.

Estate Tax: The taxation of estates can apply on two levels: federal and state.

With regard to federal estate tax, the exemption is now $11,400,000 per person. The exemption amount is to be increased annually by C.P.I. adjustment. Furthermore, the law contains a provision for “portability.” This means that, as between a married couple, the unused portion of the exemption of the first spouse to die can be preserved and utilized at the death of the second spouse by filing a simplified estate tax return. This (increased by C.P.I. adjustment of the second spouse’s exemption) at his/her death. The law creating this increased exemption is due to expire at the end of 2025, unless it is then extended. If allowed to expire, the exemption will revert to the amount existing before the change in the tax law increased by C.P.I. adjustment, estimated at $5,600,000 per person. The provision allowing portability is not set to expire.

Virginia does not have a state estate tax. However, both Maryland and D.C. have estate taxes which apply in addition to the federal estate tax.

There is one other type of “death tax” which can affect a beneficiary of an estate: the inheritance tax. Whereas an estate tax is a tax on the totality of a decedent’s assets which pass at his/her death, the inheritance tax applies to the share of the estate which a beneficiary receives. It applies even if an estate tax is also to be paid on the same share. Fortunately, very few states have an inheritance tax. In our area only Maryland has an inheritance tax. Thus, the estate of a Maryland decedent could be subjected to both federal and state estate taxes, and the beneficiary could be subjected to an inheritance tax on his/her share of the estate. (Some advice: “Don’t be caught dead in Maryland.”)

Gift Tax: The current amount which may be given annually without any gift tax consequences is $15,000 (“the annual exclusion”). This amount is subject to annual C.P.I. increases. For example, a husband and wife may each give $15,000 per year to their son or grandchild or friend. So long as the gift is within the annual exclusion amount, no gift tax return is required to be filed.

If a gift from a donor to a person exceeds the annual exclusion amount, the donor is required to file a gift tax return. The purpose of this return is to show the IRS what part of the donor’s exemption is being utilized by this gift. The gift tax exemption is the same amount as the estate tax exemption and is also to be increased by C.P.I. adjustments. Thus, if Mother gives a gift of $115,000 to Daughter, Mother would use $100,000 of her exemption that year. As with the estate tax exemption, the amount of the gift tax exemption is to revert to its level prior to the tax law changes at the end of 2015 unless the law is extended.

One note on gifts during lifetime: they carry the same basis to the donee which they had in the hands of the donor. This does not apply to gifts of cash, but should be a consideration with other gifts. For example, assume Father paid $5 for a share of GE stock. If Father gives that to Junior at a time when the stock is selling for $10 and Junior sells at that price, Junior has a capital gain of $5 which he must report on his income tax return. (Note: there is no tax to Junior for receiving the gift.) However, if Junior inherits the stock from Father at his death, Junior takes a “stepped up” basis; that is, the value of the stock at the time of Father’s death. In this way, significant capital gains can be avoided.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

Investment advisory services are offered through Amy V. Smith Wealth Management, LLC. Amy V. Smith Wealth Management, LLC, is not a registered broker/dealer and is independent of Raymond James Financial Services. Raymond James and its advisors do not offer tax or legal advice. You should discuss tax or legal matters with the appropriate professional. Dan Smith is not affiliated with Raymond James or Amy V. Smith Wealth Management, LLC. Amy V. Smith Wealth Management is located at 161 Fort Evans Road, NE Suite 345, Leesburg, VA 20176. Telephone 703 669-5022.