The federal estate tax is a major source of concern for high-net-worth individuals. It carries a 40 percent maximum rate, and it is potentially applicable on the portion of an estate that exceeds the exclusion.
In December of 2017, the Tax Cuts and Jobs Act was enacted, and it contains a provision that radically increased the exclusion. It was $5.49 million throughout the 2017 calendar year, and the exclusion was raised to $11.18 million for 2018.
This has been the standard since then, and there have been annual adjustments to bring the exclusion in line with inflation. During the current calendar year, the federal estate tax exclusion sits at $12.92 million.
You don’t have to be concerned about taxes on inheritances that you leave to your spouse, because there is an unlimited marital deduction. There would be no estate tax responsibility regardless of the amount that is transferred as long as your spouse is an American citizen.
Another rule that applies to married people is the portability factor. If you pass away before your spouse does, they would be able to add your exclusion to their exclusion.
Gift Giving
Lifetime gifting is the obvious response to the estate tax. People used to do this immediately after the estate tax was enacted in 1916, but in 1924, a gift tax was put in place to stop the practice.
It lasted for two years, but it was repealed in 1926. The gift tax was reenacted in 1932, and it has been a fact of life since that time. Since the gift tax and the estate tax are unified under the tax code, the exclusion is a unified exclusion that applies to gifts and your estate.
Annual Exclusion
However, this is not the only gift tax exclusion. There is a separate $17,000 per person, per year gift tax exclusion. You can give this much to an unlimited number of people each year tax-free without using any of your unified lifetime exclusion.
This may not sound like a lot of money for someone who is in possession of more than $12.92 million, but it can add up. You and your spouse could combine your respective annual exclusions to give $34,000 to any number of people each year.
For example, let’s say that you have four married children. You could give $34,000 to each individual, so that would be $68,000 per couple. When you multiply that by four, you are looking at $272,000 a year in tax-free transfers, and the taxable value of your estate is being reduced.
In addition to this annual exclusion, there are a couple of other types of gifts that you can give without incurring any transfer tax exposure. You can pay school tuition for students in a tax-free manner, but you have to remit the payments directly to the institution.
This exclusion does not include books, fees and living expenses, but your annual exclusion can be used to provide additional financial support.
If you pay medical bills for others, you will not be required to file a gift tax return. This exclusion extends to the payment of health insurance premiums, but once again, you have to pay the providers directly.
State-Level Estate and Gift Taxes
While we are on the subject, we should point out the fact that there are 12 states that have state-level estate taxes, and Connecticut is one of them. The exclusion in line with the federal exclusion at $12.92 million, and there is also a state-level gift tax in Connecticut
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In addition to lifetime gift giving, there are other ways that you can transfer assets in a tax efficient manner. We can show you how, and if estate taxes are not a source of concern, we can help you devise a plan that ideally suits your needs.
You can schedule a consultation appointment at our Glastonbury or Westport, CT estate planning offices if you call us at 860-548-1000, and you can use our contact form to send us a message.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.