The Tax Cut and Jobs Act of 2017 has doubled the Federal Estate and Gift Tax exemption amount from $5.6 million to $11.2 million (2018 numbers). This means that if you are married, under portability rules, you and your spouse have a $22.4 million federal estate tax exemption (at least through 2026).
Many people may not have paid too much attention to these new numbers. They believe their estate isn’t going to reach the original exemption amount anyway. In any event, with the new law, it’s worth a moment to review the basics of the Federal Estate and Gift tax.
FEDERAL ESTATE AND GIFT TAX RATE IS 40%
Any estate whose asset value exceeds the exemption is taxed at a rate of 40% for the value over the exemption amount. For example, if an estate is $1,000,000 over the exemption amount, the estate owes $400,000 in estate taxes. That is no small tax liability. It is therefore important for people to know what type of assets and activities are counted for this transfer tax.
GIFTS MADE DURING LIFE ARE COUNTED AGAINST THE EXEMPTION
Gifts made by individuals during their lifetime are counted against the Estate and Gift Tax exemption. For example, if an unmarried person gifts $1 Million dollars to their niece, their lifetime exemption amount is reduced to $10.2 Million. If their estate’s value exceeds $10.2 million at the time of their death, any excess value will be taxed at 40%.
There are a number of gifts that are not counted against the exemption. For example the annual gift exclusion which allows an individual to gift $15,000 per person per years without counting against the exemption. Check with your accountant, financial planner or attorney for other types of gifting strategies that are not counted toward the exemption.
YOU MAY NOT BE COUNTING ALL THE ASSETS IN YOUR ESTATE
People often forget about certain types of assets that count against the exemption. This is usually because the asset is not currently in possession of the individual. For example, life insurance does not pay out until the insured’s death and even then, the proceeds go to a beneficiary. However, the life insurance proceeds are counted against an insured’s estate. A small business owner, who maintains a large life insurance/keyman policy, may be closer to the exemption than he or she thinks. Another asset that can sneak up on people is inheritance. Inheritance, especially if it is kept secret until the bequestor’s death, may cause an individual’s estate to exhaust the exemption amount.
Legacy assets that have been held for many years or are difficul to value, may have appreciated far beyond an individual’s estimation. The value of an estate is calculated by valuing assets at the date of the individual’s death. So a home that was bought for $50,000 in 1970 and is now worth $2.5MM could tip an estate past the exemption amount.
Even if you steer well clear of Estate and Gift tax liability, you may still want to explore estate planning strategies to address other risk areas: creditors, long term care, family dynamics, etc.
