Under the law known as the American Taxpayer Relief Act of 2012, or ATRA, passed on January 1, 2013, estate tax was made a permanent part of the tax code and the exemption amount is automatically indexed for inflation.
Here are questions and answers concerning the federal estate and gift tax adjusted to 2016.
Who has to pay federal estate tax? In 2016, an individual can leave $5.45 million in assets free of estate taxes. If your estate exceeds $5.45 million, you will pay estate tax on the excess, unless you are married. The estate tax rate is 40% for those estates which exceed $5.45 million with no surviving spouse.
Does my spouse have to pay estate taxes when they inherit from each other? No. There is an unlimited marital deduction from estate and gift tax. The tax due, if any, will be due when the second spouse dies. The inheriting spouse must be a U.S. citizen to benefit from the marital deduction.
How much can the surviving spouse pass tax free? $5.45 million. However, if the estate of the first to die filed a federal estate tax return (even if there was no estate tax to pay) the surviving spouse can claim the unused exclusion of the spouse who died. This enables married couples to transfer up to $10.9 million tax-free. This is called "portability". (Also, if the first spouse to die created a special credit shelter trust for their property, this would transfer free of estate tax as well.)
Portability is not automatic. The executor must file an estate tax return when the first spouse dies even if there is not tax due. This return is due nine months after the first spouse dies, with a single six-month extension allowed. If the executor doesn't file the return or misses the deadline, the surviving spouse loses the right to portability and their estate will pay tax if the surviving spouse's estate exceeds $5.45 million at death.
What about lifetime gifts? Individuals can make either lifetime gifts or gifts at death, totaling $5.45 million. For example, if you have made a lifetime gift of $1 million, the unused exclusion when you die will be $4.45 million, rather than $5.45 million.
Are there gifts that don't count? Yes. An individual can give another person $14,000 per year without it counting against the lifetime exemption. Married people can combine their gifts for a total of $28,000 per gift per person. There is no limit to the number of people you can give annual exclusion gifts to. For example a married couple can give $28,000 to each of their six children, and each of their 16 grandchildren, for a total gift of $616,000, and it will not count against their lifetime exclusion. These annual exclusion gifts can be made every year. This is one good way to save estate taxes, by making gifts each year to your family and thereby reduce the size of your estate. The annual exclusion gift exemption is not automatically indexed for inflation.
Carol K. Larson
PRINGLE & HERIGSTAD, P.C.