What You Need to Know About the Estate Tax and the Gift Tax

No one wants to be subject to the “death tax,” but the good news is that less than one percent of estates will have federal estate tax liability. For 2016, the federal estate and gift tax exemption is $5.45 million per individual, up from $5.43 million in 2015. Also, Georgia has abolished the state-level estate tax.

Federal Estate Tax Basics

Current federal law establishes a “unified credit” that allows an individual to make lifetime gifts and estate bequests in amounts up to $5.45 million without being taxed. This credit is applied against the net estate value, which consists of all assets, including life insurance benefits, less any debts.

Even better, there is an unlimited marital exemption for bequests made between spouses. This means that, with the proper estate planning and tax return filings upon the death of the first spouse, a married couple can leave up to $10.9 million in assets to their beneficiaries without incurring any estate taxes.

The unified credit is scheduled to increase in future years with inflation, but the credit is historically high now, and a change in the law by Congress could lower the tax-exempt threshold with little notice. If you and your spouse’s combined assets, including life insurance benefits, are at or near the $5 million level, this is an area worth watching.

Strategic Gift-Giving

As mentioned above, the unified credit applies to both lifetime gift-giving and bequests through one’s estate. If a person gives large gifts during their lifetime, the amounts must be reported in a gift tax return, and they can chip away at the unified credit over time. Such reportable “gifts” can include adding a son or daughter’s name to a bank or investment account if they did not contribute to the account.

There is more good news when it comes to gifts, however. In 2015 and 2016, every individual can give any other individual up to $14,000 that is excluded from the gift tax calculation entirely. This means that a couple can give up to $28,000 to each of their children (or to anyone else) each year without having to file a gift tax return and without chipping away at their lifetime unified credit.  (All gifts between spouses are exempt from the gift tax.)

The end of the year provides an opportunity for some strategic gift-giving that can make use of the annual gift exclusion to large effect. For example, a married couple may establish a bank or investment account for a son or daughter and transfer up to $28,000 to it by the end of 2015. In January 2016, the couple can transfer an additional $28,000 into the account and still remain below the reporting threshold for annual gift-giving.

If you have any questions about estate tax or gift tax planning, feel free to contact our office at (404) 793-2510.

When It Comes to Estate Planning, Indecision IS a Decision (One You May Not Like)

You’ve heard it a hundred times: If you have children, own a home, or have other significant assets, it’s important to have a will, a power of attorney, and other estate planning documents. Why is this? It is to ensure the protection of you and your loved ones and the preservation of your hard-earned money.

A basic estate plan includes a will, in which you make choices about how your assets will be distributed after you are gone. In the absence of a will, the state makes these decisions for you through the law of intestate inheritance, and, as described below, the results likely are not what you would choose for your family.

For a married couple without a will, for example, Georgia law states that a surviving spouse is entitled to a “year’s support” from the estate. This is an amount that is sufficient to meet the needs of the surviving spouse and any minor children for one year. Apart from the year’s support, the law of intestate inheritance divides the estate between the surviving spouse and the children of the deceased spouse. For a married couple with one child, if one spouse dies, all of the assets that pass through the estate apart from the year’s support are split evenly between the surviving spouse and the child.

If the couple has two or more children, the surviving spouse receives the year’s support and only one-third of the assets, with the other two-thirds split evenly among all the children of the deceased spouse. This can leave a surviving spouse with much less than expected or intended.

When the children inheriting these assets are minors, the court generally will appoint the surviving parent as guardian for the children. That parent will then be required to make annual reports to the court about how the children’s money is being managed.

At the age of 18, any assets inherited by a child are placed under the child’s exclusive control. There is no limitation that these funds be used toward education, nor that they be spent over a number of years. Those types of limitations can be enforced if assets are left by will to the surviving spouse or in trust to the children, but without any estate planning, the inheriting teenagers are free to spend as they wish.

While some assets can be removed from the control of the intestate inheritance laws through joint ownership and the designation of beneficiaries on accounts, it is essential to have an overall estate plan to make sure that your assets will be distributed to whom you want, the way you want, and when you want.

Apart from the distribution of assets, there are other important directions that can be accomplished only through a will. For example, a will is the only way for parents to name a guardian for their minor children after they are gone. By appointing a guardian, parents ensure that their children will live with the caregiver they choose, and they eliminate potential disagreements among surviving family members.

A will is also the only means to appoint a trusted person to serve as the executor of one’s estate. Appointing an executor can prevent squabbling among family members or the need to compensate an administrator that is appointed by the court.

If you made a will years ago, it is important to review your estate plan with an attorney to make sure it addresses your needs and intentions as of today. This is especially true if you have since married, had children, divorced, moved to a different state, or accumulated significant assets. You should also make sure that your will and other planning documents comply with current law.

Through a power of attorney, you are able to designate a trusted person to handle your business affairs and/or medical decisions when you are incapacitated and unable to do so yourself. Whether the disability is temporary or permanent, it is important to have a power of attorney in place so that these decisions can be made in a timely way.

In the absence of a power of attorney, a formal court hearing and appointment of a guardian and conservator is required. This is a public process that is both expensive and time-consuming.

By taking control of the estate planning process with the right choices for you and your family, you prevent the state’s default settings from leading to unintended and unnecessarily costly results.