People often ask what are estate, gift and GST taxes? What impact do these taxes have on my estate planning?
Having a basic estate plan is a good idea for everyone regardless of your age or health condition. Basic estate planning is not expensive and ensures that your estate is handled in a manner that is best for you and your family. Let us help with your estate planning. Call the Law Offices of Paul F. Sherman at (503) 223-8441, or Contact Us for a free estate planning consultation.
The IRS 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 increased by Congress to $10 million through 2025. Congress has also provided an adjustment for inflation. An individual can transfer property with value up to the exemption amount either during lifetime or at death without paying any transfer tax. As such, any portion of the exemption used during lifetime reduces the amount of exemption available at death for estate tax purposes. 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 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.”
As of 2011, the $10 million inflation adjusted estate tax exemption is “portable” between spouses. 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 prior to 2026 no transfer tax is assessed on estates up to $11.18 million for individuals and $22.36 million for married couples, assuming no lifetime gifts other than annual exclusion gifts or certain transfers for educational or medical expenses were previously made.
Given the large $10 million base amount that is indexed, 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. Nonetheless, estate planning is 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.
CONTACT THE LAW OFFICES OF PAUL F. SHERMAN FOR EXPERT ADVISE ON YOUR ESTATE PLANNING
We offer competitive low cost flat fee estate plans to our clients, including a simple Will, Durable Power of Attorney and an Advanced Medical Directive. We also offer affordable complex estate planning and litigation support.
We know you have questions and we have answers. If you would like more information on preparing a will or estate planning call the Law Offices of Paul F. Sherman at (503) 223-8441 or Contact Us for a free estate planning consultation.