It is February and we are now squarely in the New Year. Each New Year brings changes and updates to the estate and gift tax codes. At Oakstone Law PL, we believe it is vital to keep your estate planning documents up to date and in-tune with these changes. This article provides a handy summary of some of the taxes affecting estate planning and some of the recently updated numbers.
Gift Tax: The gift tax imposes a tax on the transfer of property by gift from any individual. However, the Annual Exclusion allows an individual donor to give up to a certain amount to a single recipient tax free each year. The exclusion is “annual” because it is available anew each year. The exclusion rate remains the same for 2016 at $14,000.
There are no limits on the number of recipients, allowing you to gift up to $14,000 to any number of your family and friends tax free. Married couples who choose to use gift splitting may give up to $28,000 ($14,000 x 2) to a single recipient. Example: Mr. & Mrs. Jones, splitting their gifts, gave a total of $56,000 to their daughter and son-in-law in 2015, gift-tax free.
As you may have seen in prior Acorn editions, combining trusts and so-called Crummey powers allows families can make powerful use of the annual exclusion. Example: Mr. & Mrs. Jones have 3 children and 7 grandchildren. They gave a total of $280,000 to the Jones Family Trust in 2015, gift-tax free.
Important note: married couples cannot use gift splitting if they do not file a gift tax return! Many people miss this point. To avoid the return (assuming it is not otherwise required), it is important that each spouse makes separate gifts.
Estate Tax: An estate tax return must be filed by the executor for the estate of every US Citizen or resident whose gross estate exceeds the applicable exclusion amount.
The applicable exclusion amount has gone up to $5,450,000 for 2016 (up from $5,430,000 for 2015). All gifts made during one’s lifetime over the annual exclusion amount (described above) and transfers after death are included in determining if one’s gross estate is over the exclusion amount. The estate tax rate (for amounts over the exclusion amount) remains at 40% for 2016.
Married Couples together can shield, up to twice the applicable exclusion amount. For this year, that is up to $10,900,000 ($5,450,000 x 2) that a married couple may give – above and beyond the $14,000 annual exclusion – without paying any gift or estate taxes.
Exclusion amount “portability” allows a surviving spouse to use any of the unused portions of their spouse’s exclusion amount in some cases. Importantly, if one remarries after the death of a spouse, the credit of the deceased spouse is lost.
Important note: portability is only available if the executor of the estate of the first spouse to die files an estate tax return (on time!) and makes the proper election to use portability. Another important note: relying on portability is often a bad plan, particularly for blended families or those concerned about creditor and/or divorce issues (and GST tax, see below).
Generation-Skipping Tax: The generation-skipping tax (“GST”) is imposed on three types of events: direct skips, taxable distributions and taxable terminations. Each of these involves the transfer of wealth to “skip persons” – persons who are two or more generations younger than the transferor (examples: (1) grandparent to grandchild).
Direct skips are transfers directly to a skip person (or certain “alter-ego” trusts under the Code). Taxable distributions happen when a non-exempt trust distributes to a skip person. And taxable terminations happen when a non-exempt trust ends, and pays out to a skip person (directly or in further trust).
The GST tax rules give us an exemption amount we can apply towards transfers to skip persons to avoid or reduce GST tax. We can allocate our exemption to any of the three kinds of GST events described above. Examples: (1) a direct skip gift of $1M to a grandchild will use up $1M of the grandparent’s lifetime exemption (lucky grandchild!); (2) allocating $5M of GST exemption to a trust having assets valued at $5M will use up $5M of GST exemption, and make that trust permanently exempt from Wealth Transfer Taxes (which is the better deal for the family?)The lifetime GST exemption is the same amount as the gift and estate tax applicable exclusion amount –up to $5,450,000 in 2016. Likewise, the GST tax rate also remains at 40%. Important note: GST exemption is not portable between spouses, so without proper planning, the first spouse’s GST exemption will die with him.
Note the interplay between these three Wealth Transfer Taxes: First, there was an estate tax. When smart people began giving it all away before they died, Congress enacted a gift tax. Then, after smart people began giving large sums to grandchildren to avoid one generation’s worth of tax, Congress gave us the GST tax.
What do these increases mean for you?
The increase in exemptions allows for larger lifetime gifts and the ability to use a variety of estate planning techniques. This allows you to shift assets and appreciation to future generations, often with no current tax cost. Please get in touch with us to discuss making the most of your exclusions and exemptions in 2016 and beyond.
About Oakstone Law, PL
Oakstone Law PL was founded by Bob Kleinknecht. A member of the Florida Family Trust Company Subcommittee, the Estate Tax & Trust Planning (ETTP) Committee and the Real Property, Probate & Trust Law (RPPTL) Section of the Florida Bar, Kleinknecht has 15 years’ experience.
Prior to founding Oakstone law, he spent more than eight years serving as a personal, in-house estate, tax and charitable planning attorney for a Forbes 400 family in New York and Florida. Before that he was an estate planning and estate settlement attorney with prominent firms in Boston and Washington, D.C. after beginning his career with a boutique firm in Naples, Florida.
Licensed in Florida and Massachusetts, Kleinknecht has developed a practice model that eliminates billing by the hour and offers a streamlined, customized client process supported by technology, security and a personal approach.