This post will review key tax concepts that are important to understand for estate planning purposes.
Federal Estate Tax Exclusion: Generally speaking, a person's estate is subject to an estate tax. However, the amount that is excluded from federal estate tax is $5.49 million in 2017. That means a decedent's estate can be valued at $5.49 million before the highest tax rate is applied. The federal estate tax exclusion amount is inflation adjusted, so it will presumably increase every year at the rate of inflation. However, if a person's estate is above $5.49 million, the excess will be taxed at a rate of 40%.
Portability: This option allows the surviving spouse to take the deceased spouse's unused exclusion amount, if any, and add it to the surviving spouse's estate tax exclusion. Therefore, a couple can theoretically shield close to $11 million dollars in assets from estate tax. Portability used in conjunction with the unlimited martial deduction is a powerful wealth transfer tool.
Federal Gift Tax Exclusion: Generally speaking, gifts are taxable. However, as discussed before in a prior post, an individual may give up to $14,000 (in 2017) per person without paying a federal gift tax. Anything above that will require filing a gift tax return. The federal gift tax exclusion and the federal estate tax exclusion is a unified credit, so if you gift away a certain amount during your lifetime, you estate and gift tax exclusion will decrease by the amount gifted. For example, Mary gifts $1 million to her son during her lifetime. Her estate and gift tax exclusion is then reduced from $5.49 million to $4.49 million.
Unlimited marital deduction: This deduction allows spouses to pass an unlimited amount of property between themselves without paying any estate or gift taxes (if the spouse is a U.S. citizen). The unlimited marital deduction can be used to defer paying federal estate and gift taxes upon the first spouse's death.
Generation-Skipping Transfer Tax: If a person transfers assets to a "skip person", which is someone who is at least two generations below the transferor, then the federal government will impose a tax called a generation-skipping tax. The federal generation-skipping tax exclusion amount is currently $5.49 million and the federal generation-skipping tax rate is currently 40%. The federal generation-skipping tax exclusion is also unified with the federal estate and gift tax exclusion amount.
Samuel K.L. Suen is an attorney based in Honolulu, Hawaii specializing in estate planning, probate, conservatorship and guardianship matters.
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