Estate & Gift Tax Update

Paula B. Ellenberg, CPA, CVA, MST and James F. Sikora, II (Nov, 2017)

The American Taxpayer Relief Tax Act of 2012 (ATRA) set a $5 million effective estate and gift tax exemption (indexed for inflation) and a top estate tax rate of 40%.  In 2017, the applicable exclusion from the federal gift and estate tax is $5,490,000.  The applicable exclusion from the generation-skipping transfer tax (GST) is also $5,490,000.  ATRA made permanent the concept of “portability.”  Portability allows widows and widowers to carry over the unused estate tax exemption of their predeceased spouse giving a married couple a potential combined exemption of $10,980,000. 

Since the passing of the American Taxpayer Relief Act of 2012, the number of federal estate tax returns filed has decreased significantly, primarily due to the increase in the filing threshold.  In 2001 there were 120,000 federal estate tax returns filed, of which 60,000 were for taxable estates.  In 2015 only 11,917 estate tax returns were filed. 

Overall, the federal estate and gift tax is now estimated to affect only 1% of the population.  However, for that 1%, minimizing the effects of gift and estate tax, along with the generation skipping tax, remains a major goal for the ultra-high net worth individual.  Estate planning differs from individual to individual depending upon the size of their wealth, circumstances, goals, objectives, and family dynamics.  There is no one size fits all approach to estate planning.  

Currently, the United States estate and gift tax utilizes what is known as a unified credit system.  This means there is one basic exclusion amount of $5,490,000 (for 2017) that applies to both the estate and gift tax.   An individual’s gross estate is made up of all property - real or personal, tangible or intangible, generally valued at “fair market value” as of the date of death.  An estate is entitled to take deductions on the estate tax return arriving at the net taxable estate.  Examples of allowable deductions are funeral expenses, administrative expenses (including legal and accounting fees), debts of the decedent, charitable bequests, and executor’s fees.  But, most importantly, there is an “unlimited marital deduction” for any and all property transferred to the surviving spouse.  An objective for every married couple would be to maximize the use of the marital deduction. 

Where does this leave the use of trusts?  Trusts are still very valuable tools in all estate tax planning, especially for the 1%.  Revocable living trusts, asset protection trusts, credit shelter trusts, Qualified Terminable Interest Property (QTIP) trusts, charitable trusts and irrevocable life insurance trusts are most commonly used.

For those in the 99%, even if you don’t have a taxable estate, you still need to have a plan, especially if you have minor children.  The basics are a will and/or powers of attorney for tax matters and for medical reasons.  Major goals are to protect minor children by appointing guardians, make the administration of your estate after death as easy as possible and to avoid any unnecessary expenses in estate administration.   Judicial probate is a long and expensive process.  Avoiding the judicial probate process by diverting as many assets away from the probate estate as possible reduces the administrative headaches, as well as significant legal expenses.

Some areas where planning is still important regardless of the federal estate and gift tax regime in place are:

  1. Planning for the disposition of one’s assets at his or her death.
  2. Asset protection planning (protection from creditors and predators).
  3. Retirement planning.
  4. Planning for disability and incompetency.
  5. Business succession planning (with or without concerns that the estate tax will force a succession plan).
  6. Planning for possible divorce or other family relationship dissolutions.
  7. Charitable giving (for its own sake and because income tax considerations are still relevant).
  8. Planning for children with disabilities and special needs.
  9. Planning for spendthrift children.
  10.  Eldercare planning.
  11. Planning to pay state death taxes (in those states that have decoupled from the federal system and have their own death tax).

The information above reflects the current Estate & Gift Tax Laws and Regulations. If any new legislation is passed some or all of this information may become obsolete.   The “Tax Cuts and Jobs Act (H.R.1)” passed the House of Representatives on November 16, 2017.   This pending new legislation proposes to raise the federal estate and gift tax exemption (basic exclusion amount) from $5,490,000 to $10,000,000 effective for decedents dying after 2017.    It is also uncertain as to how the various states will react to any proposed change in the Federal Laws at this time.

In a nutshell, there are numerous non-transfer tax and income tax aspects of estate and gift planning that have the potential to have a large impact on our lives, and should not be left to chance.  If you have any questions or concerns about your estate or future estate plan, please do not hesitate to contact your Dermody, Burke & Brown advisor.


The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

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