by Jim Skeeles & Chris Bruynis, OSU Extension Educators
Congress passed new legislation in December affecting estate taxes, but only for 2011 and 2012, reducing federal taxation of large estates. This legislation affects families with an individual who dies in 2011 or 2012 and has assets more than one million ($1M) or an individual that gifts more than $1M dollars during this period.
With this law change, an individual can pass on a total of $5M worth of assets with no federal estate or gift tax due. Further, if the net worth of an individual’s estate combined with the total counted amount given exceeds $5M, the federal estate and/or gift tax rate has been reduced to 35%.
Also upon the death of the first spouse, the surviving spouse now receives the unused $5M exclusion of the deceased spouse. Since the surviving spouse also has her exclusion of $5M she now can transfer assets totaling $10M, either by giving them away, the assets going through her estate, or a combination of the two.
Since the federal estate tax and gift taxes are “unified”, the $5M exemption is for the combination of the value of the estate and total value of “counted” gifts over a lifetime. For instance, if the value of one’s estate is $5M and counted gifts of $1M were made over that person’s lifetime, for a total of $6M, then the amount over the exclusion, the $1M, would be taxed at 35%.
However, if the estate value is $1M with counted gifts being another $1M, the unused exclusion that could be passed onto a surviving spouse would be $3M [(5M exclusion – 1M used for estate – 1M used for gifts = 3M available to be passed onto surviving spouse) + 5M exclusion of surviving spouse = 8M available exclusion to surviving spouse].
Any assets given per person per year that total over $13,000 (has increased from $10,000 originally since indexed for inflation) count against that individual’s $5M unified exclusion. Each time a gift is over $13,000 per person per year the giver is required to file a gift tax return listing all such gifts with their income tax return for that year.
If the total counted gifts accumulate to more than $5M during one’s lifetime, gift tax will be assessed at 35% for the amount exceeding the $5M, to be paid along with income tax. If that occurs, there will be no estate tax exclusion left so estate taxes will be assessed at 35% on any countable assets in the estate.
These estate tax and gift tax changes will give a reprieve to those with estates over $1M, but only for the next two years. Those families with large estates who live into 2013 will have to give away assets to lock in these provisions. Keep in mind that if you are going to “give” assets through a trust and have them qualify for the exclusion that the assets have to be truly given and no strings can be attached. That means that assets must be truly given away or given to an irrevocable trust with someone else being the trustee.