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.
Estate, Trusts, and Gift Tax FAQ
Gift and estate taxes apply to any transfers of money, property, and other assets that are given as gifts while that person is still alive or left to heirs when he or she has died.
In most cases, the Gift and Estate Tax provisions use a standard rate schedule for any taxable gifts and estates to determine a net tentative rate. The tax amount is determined after a credit has been applied, which is based on an applicable exclusion amount. An important part of this exclusion is the Basic Exclusion Amount (BEA), and it’s first applied as a gift tax. Any credit that’s left after the person dies is applied against the estate tax.
The tax reform law doubled the BEA for every tax year since 2018, though it’s adjusted yearly to account for inflation. The BEA for 2018 was $11.18 million, but it was $11.4 million for 2019 and $11.58 million for 2020. The new tax laws only made a temporary increase, so the BEA for 2026 is expected to go down to approximately $5 million (which is where it was before 2018).
Trusts are separate legal and taxable entities, so it depends on how they’re structured. Simple and complex trusts pay their own income taxes, but grantor trusts do not. The grantor pays taxes based on his or her own income.
A simple trust requires that all income to the trust be distributed at least once a year, has no charitable beneficiaries, and makes distributions of the trust’s principal. If it doesn’t meet this definition, it will usually be a complex or grantor trust.
A grantor trust involves someone who has certain powers over its assets. These powers will be listed in the trust agreement and is the reason why they’re disregarded (and even ignored) for income tax purposes.
Some of the powers given to a grantor include the following:
– The grantor or the grantor’s spouse has the power to revoke or amend the trust.
– The grantor has the power to substitute trust assets with others that are of equal value.
– The grantor can borrow trust assets without the proper security or collateral.
– The grantor or the grantor’s spouse can receive distributions from the trust.
– The trust income can be used to pay premiums on life insurance policies on the life of the grantor or the grantor’s spouse.
For income tax purposes, the grantor trust is treated as the same taxpayer as the grantor (even though it’s a separate legal entity). So, any income generated from the trust will be reported on the grantor’s personal tax return. The grantor will have to pay the taxes.
If the trust is a simple or complex trust, the trustee must file a tax return for the trust (IRS Form 1041) if it has any taxable income (which is gross income minus deductions that’s greater than $0). For grantor trusts, it will depend on the circumstances. The grantor may use his or her own Social Security Number for the trust’s taxpayer identification number, or it may have a separate one that has been granted by the IRS.
If the grantor uses his or her Social Security Number for the trust’s taxpayer identification number, it doesn’t need to file its own income tax return. Any tax documents (such as 1099s and K-1s) will be directly issued to the grantor so they can be reported to the grantor’s individual income tax return.
If the trust has its own taxpayer identification number, it may have to file its own tax return for informational purposes. The pro forma tax return identifies the trust as a grantor trust, and it will include a grantor letter that lists all income items that should be reported on the grantor’s income tax return so he or she can pay the taxes.
If you’re looking for a CPA in Corpus Christi that can help you manage the taxes for an estate or trust, be sure to reach out to Jennings & Hawley. We have a team of experienced professionals who would be more than happy to speak with you about your business’s specific needs!