Estate Planning

PERSONAL ESTATE PLANNING

Myron M. Samole


Tax Reform became a reality with the passage of the Tax Cuts and Jobs Act of 2017 (“TCJA”) which was enacted into law on December 22, 2017. Beginning in 2018 and continuing through 2025, the exemption for federal estate, gift and generation-skipping tax, increased from the $5 million base established in 2011, to a $10 million base, which is annually adjusted for inflation. Thus in 2019, after taking into account the inflation index, the exemption is approximately $11.4 million (or $22.8 million for a married couple, when taking into account portability).

The American Taxpayer Relief Act of 2012 (2013) was passed by the Senate on New Year's Day (January 1, 2013) and shortly thereafter by the House. The  law made permanent the $5 million inflation adjusted estate tax exemption and portability (which permitted a surviving spouse to use a prior deceased spouse's exemption). For the vast majority of Americans the federal estate tax became irrelevant, as their estates were well under the federal estate tax exemption. In 2015, the $5 million exclusion was $5.43 million per individual, while the gift and estate tax rate was 40%. This meant that the combined $5.43 million exclusion for spouses in 2015 was $10.86 million. In 2016, the exclusion was $5.45 million per individual, while the gift and estate tax rate was 40%. This meant that the combined $5.45 million exclusion for spouses in 2016 was $10.90 million. In 2017, the exclusion was $5.49 million per individual, while the gift and estate tax rate was 40%. This meant that the combined $5.49 million exclusion for spouses in 2017 was $10.98 million. In 2018, the exclusion was $11.2 million for individuals and $22.4 million for spouses. In 2019 the exclusion is $11.4 million for individuals and $22.8 milion for spouses. The annual gift exclusion remains the same in 2019 at $15,000.

Also, in 2015-17, the marginal income tax rate was 39.6% (with an additional 3.8 percent Medicare contribution tax on net investment income for high income taxpayers). Once a taxpayer passed the threshold and becomes a "high income taxpayer", investment gains from selling stocks, bonds and property were subject to the additional tax, as are dividend, interest and royalty income.

However, in 2018, the marginal income tax rate has been reduced to 37%. The income tax rate continues at 37% in 2019.

2012 Tax Rules: For estates of individuals who died in 2012, the federal estate tax exemption was $5.12 million, as was the lifetime federal gift tax exemption. The estate tax rate on the taxable value of an estate in excess of the exemption was a flat 35 percent, and so was the gift tax rate on lifetime gifts in excess of the exemption.

2013 Tax Rules: The tax side of the "Fiscal Cliff" was averted in the Eleventh hour by Congress on January 1, 2013. The American Taxpayer's Relief Act avoided the automatic sunset provisions of the Bush-era tax rates scheduled to take effect after 2012. However, for those individuals with incomes above $400,000 ($450,000 for families or $425,000 for heads of households) they must now pay more in taxes with a higher 39.6% higher income tax rate for income above those levels. Moreover, they will have a 20% maximum capital gains tax rate. However, with respect to estate and gift taxes, as of 2013, there is a maximum estate tax of 40% with a $5 million exclusion.   Additionally, the valuable portability exemption between spouses has been extended.  Basically, under this exemption, the estate of a deceased spouse can transfer to the surviving spouse any portion of the federal estate tax exemption that it does not use. The surviving spouse’s estate can then add that amount to the exemption it is entitled to, increasing the total amount that can be passed on to heirs tax free. This feature makes it easier for married couples to minimize the potential impact of estate taxes.

So, the American Taxpayer Relief Act provides a 40% tax rate and a unified gift tax exemption of $5 million (inflation adjusted) for gifts made after 2012.

2014 Tax Rules. The unified credit in 2014 was $5.34 million. This means that the combined $5.34 million exclusion for spouses was $10.68 million.

2015 Tax Rules. The unified credit in 2015 was $5.43 million. This means that the combined $5.43 million exclusion for spouses was $10.86 million.

2016 Tax Rules. The unified credit in 2016 was $5.45 million. This means that the combined $5.45 million exclusion for spouses was $10.90 million

2017 Tax Rules. The unified credit in 2017 was $5.49 million. This means that the combined $5.49 million exclusion for spouses was $10.98 million

2019 Tax Rules. The unified credit in 2019 is $11.4 million. This means that the combined $11.4 million exclusion for spouses is $22.8 million

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In addition, the annual gift tax exclusion is continuing to shelter lifetime transfers to family members and loved ones. The annual gift tax exclusion hasn't been affected by other tax law modifications over the last decade and wasn't expected to change. By systematically giving gifts that qualify for the exclusion, you can gradually reduce the size of your taxable estate over time -- no matter what Congress does or doesn't do.

Here's the basic premise. Under the annual gift tax exclusion, you can give gifts of cash or property to an unlimited number of recipients up to a specified amount without any gift tax consequences. The annual threshold amount is indexed for inflation. It was $13,000 for transfers in 2012, but the exclusion increased to $14,000 for 2013-2016, and remained at $14,000 for 2017. In 2018, the exclusion increased to $15,000, and remains at $15,000 for 2019.

In other words, in 2019 you can give a single recipient cash and/or property valued at up to $15,000 completely free of gift tax anuually. If you give gifts within these limits, you don't even have to file a gift tax return.


Estate Planning

In preparing a personal estate plan, the following tools should always been considered:

1.    Living Trust Agreements;

2.    Pour-over Wills;

3.    Durable Powers of Attorney for Health Care ;

4.    Durable Powers of Attorney for Property ;


5.    Irrevocable Life Insurance Trust (on the life of the primary income earner).

After failing to extend tax reform in 2010, Estate & Gift Taxes reappeared in 2011

In 2011 and continuing to 2019, there were were much higher exemptions (a boon to the wealthy)

In 2009, Congress failed to extend the estate tax to 2010. Consequently, in 2010 there was no estate or generation-skipping tax. Moreover, Congress again failed to act during 2010, so the estate and gift taxes reappeared on January 1, 2011 – not as they were in 2009 – but as they existed in 2001.  So in 2011, the exclusion became $5,000,000 and the top marginal rate was supposed to become 55 percent, not 45 percent as existed in 2009. But a last minute change reduced the top marginal rate in 2011 to 35%. Amazingly, for 2012, because Congress failed to address the gift and estate tax exemptions before the end of 2011, the high exemptions continued.

For 2012, the amount one individual could give another annually without incurring a gift tax remains at $13,000. But because the gift and estate tax are indexed for inflation, the $5 million lifetime gift and estate tax exemption limits will rose to $5.12 million - or $10.24 million per married couple.

For 2013, the amount one individual can give another annually without incurring a gift tax was at $14,000. But because the gift and estate tax are indexed for inflation, the $5 million lifetime gift and estate tax exemption limits is at $5.25 million - or $10.5 million per married couple.

For 2014, the amount one individual can give another annually without incurring a gift tax was at $14,000. But because the gift and estate tax are indexed for inflation, the $5 million lifetime gift and estate tax exemption limits is at $5.34 million - or $10.68 million per married couple

For 2015, the amount one individual can give another annually without incurring a gift tax is at $14,000. But because the gift and estate tax are indexed for inflation, the $5 million lifetime gift and estate tax exemption limits is at $5.43 million - or $10.86 million per married couple.

For 2016, the amount one individual can give another annually without incurring a gift tax is still at $14,000. But because the gift and estate tax are indexed for inflation, the $5 million lifetime gift and estate tax exemption limits is at $5.45 million - or $10.90 million per married couple.

For 2017, the amount one individual can give another annually without incurring a gift tax is still at $14,000. But because the gift and estate tax are indexed for inflation, the $5 million lifetime gift and estate tax exemption limits is at $5.49 million - or $10.98 million per married couple.

For 2018, the amount one individual can give another annually without incurring a gift tax is  at $15,000. But because the gift and estate tax are indexed for inflation, the $5 million lifetime gift and estate tax exemption limits is at $10.00 million - or $20.00 million per married couple.

For 2019, the amount one individual can give another annually without incurring a gift tax is still at $15,000. But because the gift and estate tax are indexed for inflation, the $5 million lifetime gift and estate tax exemption limits is at $11.40 million - or $22.80 million per married couple.



Year
Top Estate Tax Rate
Exemption Amount
2002
50%
$1,000,000
2003
49%
$1,000,000
2004
48%
$1,500,000
2005
47%
$1,500,000
2006
46%
$2,000,000
2007
45%
$2,000,000
2008
45%
$2,000,000
2009
45%
$3,500,000
2010
repealed
all
2011
35%
$5,000,000
2012 35% $5,120,000
2013 40% $5,250,000
2014 40% $5,340,000
2015 40% $5,430,000
2016 40% $5,450,000
2017 40% $5,459,000
2018 40% $11,180,000
2019 40% $11,400,000

The above chart reflects the significant changes that occurred beginning in 2002 and continuing through 2019:


For 2001-2009, the law preserved the rule that stepped up (or down) basis in an asset transferred at death to its fair market value at the owner's date of death. For 2010, the one year in which the estate tax is repealed, the step-up in basis was eliminated, and assets transferred at death generally took a carryover basis (but not in excess of fair market value on the date of death). Personal Representatives (i.e., Executors) were given the authority to allocate $1.3 million worth of increased basis (plus additional basis to compensate for lost loss carry forwards and built-in losses) to certain assets passing from the decedent, and an additional $3 million worth of increased basis to assets transferred to a surviving spouse, subject to certain rules. Additional basis can only be added to certain assets passing from the decedent which were owned by the decedent at the time of death. In no event can the additional basis be allocated such that an asset has basis in excess of its fair market value. Like the other estate and gift provisions, these changes sunset in 2011; thus the current step-up in basis for all assets transferred at death was reinstated in 2011.

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The annual Gift Tax exclusion (currently $15,000 per donee), as well as the exclusion for payment of medical and educational expenses, continues to apply, as do the deductions for charitable and marital gifts.The following table shows the unified credit and applicable exclusion amount for the calendar years in which a gift is made or a decedent died after 2001:


For Gift Tax Purposes: For Estate Tax Purposes:
Year Unified Credit Applicable
Exclusion
Amount
Unified Credit Applicable
Exclusion
Amount
2002 and 2003 345,800 1,000,000 345,800 1,000,000
2004 and 2005 345,800 1,000,000 555,800 1,500,000
2006, 2007, and 2008 345,800 1,000,000 780,800 2,000,000
2009 345,800 1,000,000 1,455,800 3,500,000
2010 345,800 1,000,000
none all
2011
1,750.000 5,000,000 1,750,000 5,000,000
2012 1,772.000 5,120,000 1,772,800 5,120,000
2013 2,045,800
5,250,000 2,045,800
5,250,000
2014 2,081,800 5,340,000 2,081,800 5,340,000
2015 2,117,800 5,430,000 2,117,800
5,430,000
2016 2,125,500 5,450,000 2,125,500 5,450,000
2017 2,141,800 5,459,000 2,141,800 5,459,000
2018
4,417,800
11,180,000
4,417,800
11,180,000
2019
4,505,800
11,400,000
4,505,800
11,400,000

Gift Tax

The gift tax applies to transfers by gift of property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.

The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule.

Generally, the following gifts are not taxable gifts:

  • Gifts, excluding gifts of future interests, that are not more than the annual exclusion for the calendar year,

  • Tuition or medical expenses you pay directly to a medical or educational institution for someone,

  • Gifts to your spouse,

  • Gifts to a political organization for its use, and

  • Gifts to charities.

In 2010 the lifetime exemption from gift taxes was only $1,000,000 with a top tax rate of 35%, but under current law the lifetime exemption from gift taxes has increased to $5,000,000 and the top tax rate remains at 35%. These numbers, however, were only in effect for the 2011 and 2012 tax years. In 2013 to 2016, the lifetime gift tax exemption was $5,000,000 and the top gift tax rate was 40%.


Annual Exclusion. A separate annual exclusion applies to each person to whom you make a gift. The gift tax annual exclusion is subject to cost-of-living increases.

                                                                                                                       Gift Tax Annual Exclusion
                                                                  1998 - 2001                                                                      $10,000
2002 - 2005 $11,000
2006 - 2008 $12,000
2009 - 2012 $13,000
2013 - 2017
$14,000
2018  - 2019
$15,000

You generally give a gift valued at up to $15,000 each, to any number of people, and none of the gifts will be taxable. If you are married, both you and your spouse can separately give up to $15,000 to the same person without making a taxable gift. If one of you gives more than $15,000 to a person, fee splitting rules apply. For 2018 and 2019, the gift can be valued at up to $15,000 each, again to any number of people, and none of the gifts will be taxable. If you are married, both you and your spouse can separately give up to $15,000 to the same person in 2019 without making a taxable gift. If one of you gives more than $15,000 to a person in 2019, fee splitting rules apply.

Gift Splitting. If you or your spouse makes a gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must consent (agree) to split the gift. If you do, you each can take the annual exclusion for your part of the gift.

In 2017, gift splitting allows married couples to give up to $28,000 to a person without making a taxable gift.

In 2018 and 2019, gift splitting allows married couples to give up to $30,000 to a person without making a taxable gift.

If you split a gift you made, you must file a gift tax return (IRS form 709) to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion.

There are many aspects to an overall estate plan, which should properly be reviewed by an attorney and tax planner on an individual basis. This information is intended to give you a basic understanding of various aspects of estate planning, but it cannot substitute for a thorough review with your estate planning attorney. Preparation of Wills, Trusts and other estate planning instruments must be implemented as part of an overall estate plan. The estate plan should reflect your family, economic and tax goals. Thorough planning and review of each individual's needs, including their tax considerations must be discussed with qualified professionals.

To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained herein, unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of: (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any matters addressed herein.

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