The Lifetime Exemption to Gift and Estate Taxes
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The document outlines the probate process and the impact of gift and estate taxes, detailing how proper estate planning can reduce tax liability. It describes the estate of John, who upon his death, left an estate valued at $4 million, resulting in a tax obligation of $400,000, while his wife Anna could potentially combine their lifetime exemptions to avoid taxes on her $8 million estate. Additionally, it explains that married couples can utilize gift-splitting, allowing significant tax-free transfers to their children over a ten-year period.
The Lifetime Exemption to Gift and Estate Taxes
- 8. All assets must be identified and valued as part of the probate process The gift and estate tax has been as high as 55 percent in recent years American Taxpayer Relief Act of 2013, or ATRA, permanently set the tax rate at a maximum of 40 percent Careful estate planning can decrease, or eliminate, exposure to gift and estate taxes
- 15. John and Anna are married John recently died John left behind an estate valued at $4 million less than his lifetime exemption limit
- 16. John made gifts during his lifetime totaling $2.25 million bringing his total gifts to $6.25 million $1 million of Johns estate is subject to federal gift and estate taxes Johns estate would owe $400,000 in taxes ($1 million x 0.40 = $400,000)
- 19. John can leave his $44 million estate to Anna and avoid gift and estate taxes John has then only used $2.25 million of his $5.25 million lifetime exemption as a result of gifts he made during his lifetime This could over-fund Annas estate
- 20. Assume that Anna also has $4 million in separate assets she now has an estate valued at $8 million -- $2.75 above her lifetime exemption limit Even if Anna made no additional gifts during her lifetime, her estate would now owe $1.1 million in gift and estate taxes when she dies ($2.75 million x 0.40 = $1.1 million)
- 24. Anna may combine the unused portion of Johns lifetime exemption with her own exemption for a total exemption of $8.25 million ($3 million + $5.25 million). If Annas estate does not grow she can avoid gift and estate taxes because her estates value of $8 million is less than her total exemption of $8.25 million
- 30. Allows a taxpayer to make as many gifts as he/she wishes valued at up to $14,000 each year to as many recipients as he/she wishes without incurring gift and estate taxes Gifts made using the annual exclusion do NOT count toward the lifetime exemption limit Married couple may use gift-splitting to double value of a gift
- 31. Anna could use it after Johns death Anna and John could have used it prior to his death If Ann and John have 4 children and they used the gift-splitting option to gift to all four children for ten years they could have transferred $1.12 million taxfree. ($28,000 x 4 x 10 = $1.12 million)