By Fredrick P. Niemann, Esq. of Hanlon Niemann, a NJ Estate Planning Law Firm
The Federal government through the IRS imposes three different types of tax on the transfer of wealth from one individual to another, namely: (1) estate, (2) gift, and (3) generation skipping transfer taxes. New Jersey has its own separate state death transfer tax to pay, but that’s a separate topic and not part of this article.
The 2014 exemptions from the Federal estate, gift and generation skipping transfer (or “GST”) tax have increased to $5,340,000 per person. Not bad. The gift and estate tax exemptions have been unified, meaning that if an individual makes a gift during his or her lifetime, he or she may lose a portion of their exemption from tax if the gift is large enough.
But consider this: Not all gifts reduce an individual’s gift and estate tax exemptions. Gifts to pay certain education and medical expenses and most gifts to spouses and charities do not use any portion of a donor’s exemptions. For other gifts, there is an “annual exclusion” of $14,000 per year per done. This means total gifts of less than $14,000 in value per person in a calendar year do not use any portion of a person’s lifetime gift and estate exemption. For example, if husband gifts $250,000 to his wife, gifts $100,000 to his favorite charity and gifts $50,000 to a child, he will use $36,000 of his available $5,340,000 lifetime gift exemption. As a result, if husband later dies in 2014, his estate would require an estate tax return only if it exceeds $5,320,000.
Federal estate taxes are determined by first calculating the decedent’s “gross estate”, which generally includes all assets of any type owned at death wherever located (either directly or indirectly but with a sufficient level of beneficial interest or control). If the decedent’s gross estate exceeds $5,340, a Federal estate tax return is due and any estate tax liability must be paid within nine months of date of death. Deductions are allowed from the gross estate to determine the amount of estate tax due, including payments for final debts and expenses, estate administration expenses and distributions to qualified charities and a surviving spouse (either outright or in qualifying trusts).
Generally speaking, gift and estate exemptions are “portable” between spouses. This fairly recent change to the law allows a surviving spouse to use a deceased spouse’s unused exemption for lifetime gifts by the surviving spouse or in the surviving spouse’s estate. For example, if a deceased husband’s estate is worth $3,000,000 at the time of death, his unused $2,340,000 lifetime exemption can be assigned over for the benefit of his surviving spouse. Upon the death of his wife, her estate exemption (assuming she doesn’t make any taxable gifts) will be $7,680,000 (her $5,340,000 exemption plus her husband’s unused exemption).
Now comes generation skipping taxes. It’s a term less familiar to most folks. The GST tax is imposed on transfers made to a person or placed in trust for individuals who are two or more generations younger than the grantor (e.g., transfers to grandchildren). For wealthier families, use of GST exemption into one or more lifetime trusts for children and then grandchildren is a common aspect of their estate plans. Such a “GST Exempt” trust could pass to grandchildren at a child’s death without being included in the child’s taxable estate.
These tax laws seem very complex. But, with a death tax rate of 40% on transfers exceeding the $5,340,000 exemption discussed above, it is very important to work with an advisor to minimize these taxes when possible.
If you have questions regarding estate planning, or estate and tax reduction planning, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at firstname.lastname@example.org/, or visit him at www.njestateplanninglawattorney.com.