Estate tax and related planning
The estate tax affects only certain estates: in 2023 it applies to estates exceeding a taxable value of $12.92 million, which is taxed at a rate of 40%. While this does not give cause for concern to many, these figures can and do change. Estate tax is often debated in politics and it frequently changes. Just for example, as recently as 2017, a taxable estate was just under $5.5 million, but just 9 years earlier, in 2008, the amount was $2 million.
These changes in estate tax do pose concerns from an estate planning perspective. Simply stated, the higher the value of an estate, the more “at-risk” it is over time of owing estate tax.
Estate planners use various strategies to reduce an estate before death and minimize the potential estate tax liability. One of these strategies is gifting property annually during a lifetime.
Individuals may gift money each year to individual recipients without triggering tax consequences, the amount of which is set by the federal government’s annual exclusion. As mentioned in an earlier blog, in 2023, the annual exclusion is $17,000 per recipient. A substantial reduction in the estate tax can be had if gifts of this nature are given for a number of years during life, thereby saving potentially millions of dollars in estate tax upon death.
If a donor gifts an amount exceeding this annual exclusion to an individual, the excess will trigger a gift tax. This operates similarly to the estate tax but importantly, these two tax regimes are unified, so gifts exceeding the annual exclusion will eat into the estate tax exclusion amount. In addition, this is a unified credit, so any amount not gifted during life can be passed on to heirs after death, and gifts within the annual gift exclusion do not count against that credit.
For estate planning purposes, what kind of property should be gifted, and what kind should be left in the estate to pass to heirs upon death? Of course, what you should do with your particular assets should be discussed with your trusted estate planning attorney and also with your accountant or tax professional. Generally speaking, unappreciated property may be best gifted during life, and highly appreciated property generally may be best passed upon death. This may well depend on the “basis”, meaning the amount paid to purchase or acquire the property itself, serving as a starting point for gains and losses on when the property is distributed or disposed of. A higher basis in that property would avoid large gains and which may trigger income tax.
A ”transferred basis” occurs when the recipient of the property takes the donor’s basis, but there will be a “step up” in that property’s basis up to its fair market value immediately before death. This may be helpful for non-appreciated assets like cash or collectibles.
All of these gifting issues and exposures to estate tax are important matters to consider for your individual situation and circumstances together with your trusted estate planning lawyer.