While the task of estate planning can be daunting, Jennings Hawley, and Co., P.C. can assist you through every step of the process. We can clearly define your estate planning goals by assisting you with preparing, organizing, and reviewing your estate planning documents including current wills, trusts, health care and power of attorney. We can assist you in limiting the taxes at time of death and transferring the assets of your estate to heirs in accordance with your wishes. Our aspiration is to decrease any problems and expenses associated with probate and to help you with living wills, trusts, lifetime family wealth transfers, family partnerships and other business relationships, leaving money to charities, and preparing for any estate and trust tax challenges.
Estate Taxes
The money and property you own when you die (which is called your “estate”) may be subject to federal gift and estate tax, some form of state death tax, and generation-skipping transfer taxes. It’s important to understand all of these taxes, especially since the following was passed:
- The Economic Growth and Tax Relief Reconciliation Act of 2001.
- The Tax Relief, Unemployment Insurance Reauthorization.
- The Jobs Creation Act of 2010.
- The American Taxpayer Relief Act of 2012.
- The Tax Cuts and Jobs Act.
If you give away money or property at some point in your life, those transfers could be subject to gift and estate tax (sometimes even on the state level). The same may be true for any money or property you own when you die. If you want to make smarter financial decisions, you need to understand each of these taxes (which are governed by a small number of tax laws).
Changes to the Federal Gift and Estate Tax
Before 2001, no gift and estate tax was imposed on the first $675,000 of combined transfers (which refers to all transfers that were made during life and at death). At that time, the same tax rates applied to both gifts and property that was part of a deceased person’s estate. Like current income tax rates, gift and estate tax rate rates were graduated. Under this unified system, the person who received a lifetime gift got a “carryover basis” in the property that he or she received. Someone who received a bequest (a gift made at death) received a “step-up basis,” which is an adjustment in the cost basis of the inherited asset to its fair market value on the date of the giver’s death.
The Tax Acts of 2001, 2010, and 2012 (along with the Tax Cuts and Jobs Act) changed this tax system on a substantial level. The applicable exclusion amount for gift tax purposes was increased to $1 million, but it gradually increased until it reached $3.5 million in 2009. In 2010, the estate tax was repealed. Taxpayers received a carryover income tax basis for any property being transferred at death. They could also choose to pay the estate tax and get the step-up basis.
The Tax Act of 2010 also re-unified the gift and estate tax system as it increased the applicable exclusion amount to $5,120,000 in 2012, which was when the top gift and estate tax rate was 35 percent. The Tax Act of 2012 increased the applicable exclusion amount to $5,490,000 in 2017. It also increased the top gift and estate tax rate to 40 percent for 2013 and later. The Tax Cuts and Jobs Act was signed into law on December 2017. It doubled the gift and estate tax exclusion while also increasing the gift and estate tax exemption to $11,180,000 in 2018.
The Current Federal Gift and Estate Tax System
In 2023, the gift and estate tax exemption (which is also referred to as the “unified credit”) is $12,920,000. This is an increase from $12,060,000 in 2022. After 2015, the gift and estate tax exemption rate as well as the real estate exclusion amounts are scheduled to go back to pre-2018 levels (which will cut the amount to roughly $6 million). But a number of transfers can still be made without being subject to gift tax. Some of them include the following:
- Gifts to a U.S. citizen spouse.
- Gifts up to $175,000 to a non-citizen spouse.
- Gifts to qualified charities.
- Gifts that total up to $17,000 to any one person or entity during the tax year (or $34,000 if the gift is made by you and your spouse if you’re both U.S. citizens).
- Amounts paid on your behalf of any person as tuition to an educational organization or to someone who provides medical care.
Be sure to speak to a professional for more information.
The Federal Generation-Skipping Transfer Tax
The federal generation-skipping transfer tax is imposed on transfers of property that you make in your lifetime or when you die to someone who is two or more generations behind you (such as a grandchild). It’s also imposed in addition to the federal gift and estate tax. If you make cumulative generation-skipping transfers that exceed the current tax exemption, a flat tax that’s equal to the highest estate tax bracket will be in effect during the year you make the transfer. It will also be imposed on every transfer you make after your exemption has run out.
If you’re looking for a CPA in Corpus Christi to help you to better understand gift and estate taxes, be sure to get in touch with Jennings & Hawley.