Historically speaking, the federal estate tax is an excise tax levied on the transfer of a person's assets after death. In practice, it is neither a death tax nor an inheritance tax, but more accurately a transfer tax. There are three distinct aspects to federal estate taxes that comprise what is called the Unified Transfer Tax: Estate Taxes, Gift Taxes, and Generation-Skipping Transfer Taxes. Legal planning to avoid or minimize federal estate taxes is an essential part of comprehensive estate planning.
The most recent iteration of the federal estate tax was signed into law on January 2, 2013, as part of the American Taxpayer Relief Act of 2012 (ATRA 2012). There are a few things you ought to know about this law, since it affects your estate planning. Specifically, you should know the "numbers" governing transfers subject to estate, gift and generation-skipping transfer taxation.
The $5 million exemption signed into law on December 17, 2010, under the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (TRA 2010), is now permanent under ATRA 2012, as indexed for inflation. Accordingly, the federal estate tax exemption for 2013 was $5.25 million, 2014 was $5.34 million, 2015 was $5.43 and for 2016 is $5.45 million, thanks to that inflation indexing (and a nearly "automatic"* $10.9 million for married couples who follow very specific requirements at the death of the first spouse).
The ATRA 2012 continues the concept of a unified exemption that ties together the gift tax and the estate tax. This means that, if you utilize your lifetime gift tax exemption while living, your federal estate tax exemption at death will be reduced by that amount. Your unified lifetime gift and estate tax exemption in 2016 is $5.45 million, as indexed for inflation up from $5.43 million in 2015. Likewise, the top tax rate is 40%. Note: Gifts made within your annual gift exclusion amount do not count against your unified lifetime gift and estate tax exemption and reduce the amount of these exemptions.
The annual gift exclusion is currently $14,000 for 2016, just as it was for 2013, 2014 and 2015. Married couples can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $28,000 to as many individuals as they choose each year, whether both spouses contribute equally, or if the entire gift comes from one spouse. In the latter instance, the couple must file an IRS Form 709 Gift Tax return and elect "gift-splitting" for the tax year in which such gift was made.
The amount that can escape federal estate taxation between generations, otherwise known as the Generation-Skipping Transfer Tax Exemption (GSTT) is unified with the federal estate tax exemption and the lifetime gift tax exemption at $5.45 million, as indexed for inflation up from $5.43 in 2015. As with estate and gift taxes, the top tax rate is 40%.
So, what is this GSTT? Basically, it is a transfer tax on property passing from one generation to another generation that is two or more generational levels below the transferring generation. For instance, a transfer from a grandparent to a grandchild or from an individual to another unrelated individual who is more than 37.5 years younger than the transferor.
Properly done, this can transfer significant wealth between generations.
The ATRA 2012, makes "permanent" a new concept in estate planning for married couples, ostensibly rendering traditional estate tax planning unnecessary. This concept, called "portability," means that a surviving spouse can essentially inherit the estate tax exemption of the deceased spouse without use of "A-B Trust" planning. As with most tax laws, however, the devil is in the details. For example, unless the surviving spouse files a timely (within nine months of death) Form 709 Estate Tax Return and complies with other requirements, the portability may be unavailable.
In addition, married couples will not be able to use the GSTT exemptions of both spouses if they elect to use "portability" as the means to secure their respective estate tax exemptions. Furthermore, reliance on "portability" in the context of blended families may result in unintentional disinheritances and other unpleasant consequences.
If you are concerned about how your current estate and gift planning may function in light of ATRA 2012, and thereafter, then we encourage you to schedule a consultation.
Maryland, unlike many other states, has both an estate tax - a tax paid by the estate, and an inheritance tax - a tax paid by the recipient of a gift from an estate.
Maryland has a Maryland Estate Tax lower than the federal threshold, so Maryland households that may not owe Federal Estate Taxes may still owe estate taxes to Maryland. The amount of an estate, which is exempt from paying Maryland estate taxes is as follows:
2016 - $2,000,000
2017 - $3,000,000
2018 - $4,000,000
2019 Equal to the Federal Estate Tax.
The Maryland Estate Tax means shifting your residence or assets out of Maryland reduces these estate taxes. The Maryland estate tax only applies to the intangible assets of descendants residing in Maryland and to Maryland real estate. Transferring real estate into an entity such as a limited liability company may convert it into intangible property and possibly alter whether it is taxable. Further, until 2019, married couples in Maryland may need to use special Maryland trusts to reduce their Maryland Estate Taxes. Schedule a consultation to protect your estate from Maryland estate taxes.
Maryland Inheritance Tax Section 7-202 of the Tax-General Article provides that, unless an exemption applies, the Maryland-inheritance tax is imposed on the person who inherits from anyone with a taxable estate in Maryland. This Maryland inheritance tax applies to the following types of property: property passing by Will or without a Will; lifetime transfers made in contemplation of death or two years before death; property of which the decedent was an owner; and property which the decedent controls during life. Certain types of property are exempt from the Maryland inheritance tax and the Maryland inheritance tax does not apply to property passing from the decedent to immediate family members. A Will can also control whether this tax burden is paid by the beneficiary or from other assets within the estate. We encourage you to schedule a consultation to minimize the Maryland Inheritance Tax burden that your heirs would be responsible for.
For 2016, the Washington D.C. Estate Tax threshold is $1,000,000, so residents who do not owe Federal Estate Taxes may owe District Estate Taxes. The estate tax threshold for the District of Columbia is scheduled to rise if D.C. meets budget goals. The District of Columbia does not have an inheritance tax. Schedule a consultation to protect your estate from District of Columbia estate taxes.