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.