Gift and Estate Tax Basics

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Gift and estate tax basics
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Tax Avoidance Strategies
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Estate Planning Goals
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One common goal of estate planning is tax
avoidance
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To understand why tax avoidance strategies are
commonly employed in estate planning you need to
understand how gift and estate taxes work first
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What Is the Gift and Estate Tax
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All gifts made during your lifetime, as well as
all assets owned by you at the time of death, are
potentially subject to gift and estate taxes
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Anything you give away for which you do not
receive full consideration in return is a gift
Certain types of gifts are excluded
Because of the lifetime exemption and yearly
exclusion most gifts of small value are not
actually taxed
Value of lifetime gifts plus value of assets
owned at death are added together and then
potentially taxed
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Gift and Estate Tax Rate
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Historically fluctuated every few years
American Taxpayer Relief Act of 2013, or ATRA,
permanently set the gift and estate tax rate at a
maximum of 40 percent
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Unlimited Marital Deduction
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The unlimited marital deduction allows a taxpayer
to transfer assets of unlimited value to a spouse
during the taxpayers lifetime or at the time of
death without incurring gift and estate taxes
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For illustration purposes, imagine that Thomas
and Ellen are married at the time of Ellens
death on January 1st, 2014
Ellen owned assets valued at 5 million when she
died and made a total of 2 million worth of
qualifying gifts during her lifetime
Thomas also owns 5 million in assets
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Ellen can leave all of the assets she owned at
the time of her death to Thomas without Ellens
estate having to worry about gift and estate taxes
Thomass estate may be overfunded though after
the gift
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The Lifetime Exemption
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Each taxpayer is entitled to exempt a specific
amount of gifts and assets over the course of a
lifetime from gift and estate taxes
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Lifetime exemption has fluctuated wildly over the
years
ATRA set it at 5 million, adjusted for inflation
each year
Exemption amount is 5.34 million for 2014
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Thomas now has an estate valued at 10 million
4.66 million would be taxed at 40 percent
Thomass estate would owe 1,864,000 in estate
taxes
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Portability
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ATRA also made the concept of portability
permanent
Allows taxpayer to use any unused portion of a
spouses lifetime exemption
Thomas could exempt an additional 3.34 million
by using Ellens unused exemption
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Thomas cannot use the full 5.34 million because
Ellen made lifetime gifts valued at 2 million
Brings Thomass taxable estate down to just 1.32
million
Brings the tax liability down from 1,864,000 to
just 528,000
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The Annual Exclusion
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The annual exclusion allows each taxpayer to make
gifts valued at up to 14,000 (for 2014) to as
many beneficiaries as the taxpayer wishes each
year without incurring a gift tax
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Married couples can combine gifts
(gift-splitting) to gift assets valued at up to
28,000
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Annual Exclusion gifts do not count toward the
LIFETIME EXEMPTION LIMIT
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Assume Thomas lives an additional ten years
Assume Thomas used the annual exclusion to make
yearly gifts to the couples three children and
five grandchildren
Thomas could annually gift 112,000 for a total
of 1.12 million tax-free
Brings his taxable estate down to just 200,000
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Tax obligation is now just 80,000
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By employing gift and estate tax avoidance
strategies the amount of tax due on Thomass
estate was reduced from 1,864,000 to 80,000, a
savings of 1,784,000 money that will go to
Thomas and Ellens loved ones instead of to the
IRS
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Had they started earlier they might have been
able to avoid gift and estate taxes entirely
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LEARN MORE ABOUT FEDERAL AND ILLINOIS GIFT
ESTATE TAX
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Click to visit www.NashBeanFord.com
445 US Highway 6 East, Geneseo, IL 61254Phone
[phone]
5030 38th Street, Suite 2, Moline, IL
61265 Phone [phone]