Taxation of Gifts & Estates is a topic that is often misunderstood. Many misconceptions about Gift & Estates tax are floating out there. The following are some important things to note about current Gift & Estate Tax laws.
Federal Estate Tax Applies Only to Property Transfers at Death that Exceed Exemption Limits
In 2019 individuals can pass $11.4 Million upon death to beneficiaries before paying any federal estate tax. This allows married couples to pass $22.8 Million with no estate tax. These exemption amounts will expire at the end of 2025, unless Congress extends them, becoming half of their current values. If the exemptions expire, individuals still can pass approximately $6 Million upon death, tax free, in 2026. For Estates above these limits, the tax rate is an escalating scale that tops out at 40%.
Taxes are Paid by the Estate, Not the Beneficiary (for Arizona residents at least)
If “Bill” dies single with an estate valued at $12 Million, estate taxes are based on the $600 thousand that exceeds the $11.4 Million exemption. The Estate pays about $220,000 in federal estate taxes (37% marginal rate) and the remaining $11,780,000 can be distributed to beneficiaries. Beneficiaries are NOT TAXED on their inheritance in Arizona (only 5 States charge beneficiaries an “inheritance” tax).
Gift Tax and Estate Tax Exemptions are Shared
Large gifts, over $15,000 to a single recipient in one year, must be reported to the IRS. Reported gifts during your lifetime are deducted from your lifetime Gift & Estate Exemption amount. Suppose that “Bill” gave $1 Million as a gift to his daughter in 2018 and died in 2019 with a $12 Million estate. Bill’s estate exemption limit is reduced by the $1 Million gift and his estate can only pass $10.4 Million tax-free to beneficiaries. Bill’s Estate must pay estate tax on the $1.6 Million that exceeded his exemption ($13 Million in lifetime and estate transfers minus Bill’s $11.4 Million Exemption equals $1.6 Million subject to almost a 40% tax rate). Bill’s Arizona beneficiaries do not pay taxes on their inheritance.
Do not confuse a “reportable gift” with a “taxable gift”. All gifts exceeding $15K are reportable, but they are not taxable until you have exceeded your lifetime exemption.
Gift Tax is Paid by the Giver, Not the Receiver
Suppose “Bill the Billionaire” gives $20 Million to his friend “Lucky” this year. Bill reports a $20 Million gift to the IRS and pays gift taxes on the $8.6 Million that exceeded his lifetime Gift & Estate exemption of $11.4 Million. Bill pays approximately $3.43 Million in Gift Taxes. When Bill dies, his Estate pays estate tax on 100% of his property because he used up his exemption during his lifetime.
Your Gift & Estate Tax Lifetime Exemption is used during your lifetime or upon death. Whatever you use during your lifetime is not available upon death.
Some gifts are not counted against your lifetime exemption limit. Gifts up to $15K per person per year are not reportable to the IRS and are made without reducing your Exemption limits.
For example, “Bill & Linda the Billionaire Couple” may engage in a “gifting program” where they give each child $30K per year with no tax consequences ($15K from Bill & $15K from Linda) or $60K per year to each child and their spouse. These gifts reduce the size of Bill & Linda’s estate over time and lower their estate taxes when they pass away. Again, the children receive the gifts tax-free each year.
Hopefully by having a better understanding Gift and Estate taxes you can….
Leave a Legacy! Not a Burden.