Here is some help understanding the federal Estate and Gift Tax.

The Unified Credit: How it Works

With the tax legislation enacted at the beginning of 2015, every individual has a $5,430,000 exemption from the estate/gift tax. To most American families whose wealth doesn’t come near $5 million, this kind of talk is irrelevant or even absurd. But for families of great wealth, even a $5 million exemption may be woefully inadequate. Wherever you stand on the wealth spectrum, it’s important to understand how to use the exemption and annual gift tax exclusions to maximize lifetime gifts and assets you leave at death.

The $5,430,000 Unified Credit: What It Means

Under the U.S. estate tax system, gifts made during life and at death are taxed under a “unified” system.  In short, this means every individual can make tax free gifts during life, or bequests at death, up to $5,490,000 (for 2017). This means if you die in 2017 with an estate worth less than $5,490,000 million, you will owe no federal estate tax.

Certain states impose an estate tax at a lower threshold. For example, New York’s estate tax kicks in at about $3.0 million – but if your estate is higher than the New York exemption, the full amount can be subject to estate tax, not just the amount above the exemption amount. You can also make unlimited gifts to a spouse and charitable gifts and not use your exemption. Federal estate taxes are at a 40% rate and New York is as high as 16%.

More sophisticated tax planning is needed if you are in this position!

Lifetime gifts as well as bequests you make at death, eat into your available exemption. For example, if you buy your newly married child a $200,000 home as a wedding gift, you will use up $200,000 of your $5,490,000 exemption. (This doesn’t take into account the annual $14,000 exclusion.)

What Gifts Count Against The $5,430,000 Exemption?

Not all gifts you make are considered “taxable gifts” for purposes of eating away at the available $5,430,000 federal estate tax exemption. The following gifts don’t are “freebies,” i.e., they don’t use up any of the exemption!

  • Annual Gift Tax Exclusion: Individuals can can make gifts (up to $14,000 per donee in 2015) to an unlimited number of people. A couple of things to know here:
    • You can give any number of people $14,000 each and incur no gift tax! This comes in handy when making gifts to children and grandchildren.
    • The gift must be of a “present interest,” i.e., something that the recipient can use/have access to now. For example, if a gift is made in trust, and the benefit won’t come until years down the road, it will not qualify as an annual exclusion gift.
    • If the gift is made by a married couple, the exemption is $28,000. A gift tax return for a split gift may be required if the funds come from only one spouse.
  • Payments of Education Expenses:  An individual can make gifts of tuition on behalf of another if the payment is made directly to the educational institution. Books, dorm fees and boarding are not eligible for the exclusion.
  • Payments of Medical Expenses:  Amounts paid directly to healthcare providers also qualify for the unlimited gift tax exclusion.

The tuition and medical expense exclusions are available without regard to the relationship between the giver and the beneficiary.  These are in additional to the annual gift tax exclusion ($14,000) also available.

It’s important to plan ahead when deciding how to distribute your assets. At the law firm of Susan G. Parker, Esq. PC (914) 923-1600, to start planning today.