Estate, Gift and GST Taxes

The federal government imposes taxes on gratuitous transfers of property made during lifetime (gifts) or at death (bequests/devises) that exceed certain exemption limits. Gift taxes are imposed on transfers during lifetime that exceed the exemption limits, and estate taxes are imposed on transfers at death that exceed the exemption limits. The generation-skipping transfer (GST) tax is imposed on transfers to grandchildren and more remote descendants that exceed the exemption limits so transferors cannot avoid transfer taxes on the next generation by “skipping” a generation. The GST tax is levied in addition to gift or estate taxes and is not a substitute for them.

The gift, estate, and GST tax exemptions were $11 million in 2018. With the passage of the “Tax Cuts and Jobs Act of 2017”, exemptions from Estate Tax have been doubled from $5.6 Million to $11.2 Million per person ($22.4 Million for married couples) through December 31, 2025, resulting in allowing an individual to plan his or her estate affairs without “making the tax tail wag the dog”. An individual can transfer property with value up to the exemption amount either during lifetime or at death without paying any transfer tax. In other words, any portion of the exemption used during lifetime reduces the amount of exemption available at death for estate tax purposes. For example, if you made a lifetime taxable gift of $2 million in 2018, your remaining exemption amount that could be used by your estate at your death would be $9.2 million. The GST exemption essentially allows the earmarking of transfers, made during lifetime or at death, that either skip a generation or are made in trust for multiple generations. Certain gifts are not applied toward the exemption, such as “annual exclusion” gifts ($14,000 per donee per year) and direct payments to medical or education providers, and can be made completely tax-free.

Transfers between spouses and to certain trusts for spouses, made during lifetime or at death, may be made without the imposition of any tax. These transfers also do not use any exemption. This is known as the “unlimited marital deduction.”

The $11.2 million inflation adjusted estate tax exemption is “portable” between spouses beginning so that a surviving spouse may take advantage of a deceased spouse’s unused exemption (DSUE) through lifetime gifts by the surviving spouse, or at the surviving spouse’s later death.

This means that no transfer tax is assessed on estates up to $11.2 million for individuals and $20.4 million for married couples, assuming no lifetime gifts other than annual exclusion gifts or certain transfers for educational or medical expenses were previously made.

It is important to note that there was these amounts will be indexed to inflation and the annual increases in the exemption amounts are likely to be substantial, even when inflation is not particularly high. This will create new planning opportunities. First, for taxpayers who fully use their exemption in any given year, there will be a significant new exemption available the next year. Second, for the first time, the growth in the exemptions will enable taxpayers whose estates grow to remain protected from the imposition of transfer tax.

With the new high exemptions, most people will no longer be subject to the federal estate tax, but this fact should not be interpreted to mean that planning is not necessary. Federal estate, gift and GST taxes are but one component of the myriad of issues addressed in the estate planning process. In addition, many states now impose state estate tax, and the state estate tax exemption, if any, may be much lower than the federal exemption. The most common state estate taxes are based on a specified percentage of the federal estate tax. Some states impose an inheritance tax tied to the family relationship between the decedent and the recipient of property from the estate.

Only Connecticut currently imposes a state gift tax. This means that residents of any state, other than Connecticut, that imposes a state estate tax, may be able to significantly reduce or even eliminate their state estate tax at death by making gift transfers during their lifetimes. These taxes can be particularly complex or apply in unexpected ways. In addition, the determination as to which state may tax a particular taxpayer or tax property located within that state regardless of where the taxpayer resides is complex. Accordingly, this type of planning should be pursued only with professional guidance.