Overview of Estate and Gift Tax:
Federal Gift Tax: A tax on transfers made without adequate payment during life.
Federal estate and gift taxes are integrated. One set of rates is applied to the cumulative transfers made by a taxpayer during life and at death. The tax is imposed on the person transferring property rather than on the recipients, although the IRS can collect a decedent's unpaid tax from those receiving property.
Every taxpayer is allowed exclusions from gift and estate tax before the tax is imposed. The lifetime gift/estate tax exclusion is $5 million in 2011, $5,120,000 in 2012, $5,250,000 in 2013, $5,340,000 in 2014, $5,430,000 in 2015, $5,450,000 in 2016, $5,490,000 in 2017, $11,180,000 in 2018, $11,400,000 in 2019, 11,580,000 in 2020, $11,700,000 in 2021, $12,060,000 in 2022.
Annual Gift Tax Excluson remains at $15,000 in 2019, 2020 & 2021; $16,000 in 2022, only the excess is a taxable gift
Income Tax on Inheritance:
-Annuities (except decedent's investment in the contract)
-Investment income paid after death
-Payments from employer - Wages, salaries, bonuses, commissions, back pay, vacation pay, sick pay.
-Contracts for deed and other installment sales (gross profit percentage)
-Series EE bond interest accrued through date of death unless decedent paid tax annually
-Traditional IRA's (except nondeductible contributions), deferred compensation, qualified pension plans, profit-sharing plans, SEP plans, Keoghs.
-Life insurance proceeds
-Cash, bank accounts, CD's
-Stocks, bonds, mutual funds (value on date of death is not taxable because basis steps up or down to FMV on the date of death
-House, cabin, other real estate (value on date of death is not taxable)
-Cars, vehicles, household goods, jewelry, other personal property (value on date of death is not taxable)
-ROTH IRA held more than five tax years
-Payment from a probate estate of a sum of money or other property specifically described in a will.
A gift tax return (Form 709) must be filed if a taxpayer makes any "taxable gifts" in the calendar year. "Taxable Gifts" are generally amounts over $15,000 (for 2020 & 2021); $16,000 for 2022 given to someone other than a spouse or charity. Although tax is calculated on the return, no tax is due until the taxpayer exhausts the exclusion amount noted above.
Each year that a gift tax return is filed, gifts made in all prior years must be reported on the return. Gift tax is calculated on the cumulative total. The tax due is the difference between the tax on the cumulative total and the tax on gifts made in prior years, less any remaining allowable credit.
Federal Estate Tax:
A tax on transfers of property at death.
An estate tax return (Form 706) must be filed if the decedent's gross estate at death plus taxable lifetime gifts exceed the exclusion exemption amount as noted above. The gross estate includes all property owned by the decedent at the time of death--cash, investments, real estate, vehicles, personal property, life insurance proceeds from policies owned by the decedent within three years of death, life insurance paid to the estate, retirement assets and business interests. The gross estate includes assets passing through probate as well as assets inherited directly by joint owners or beneficiaries. It includes partial interest, intangible property, property placed in a revocable trust and other interests transferred by a decedent who retained control or an interest in the property.
The estate can deduct its funeral expenses, administrative expenses, claims paid (including decedent's debts) and losses. With a few minor exceptions, the estate is allowed to deduct the entire amount of property passing to qualified charities and to a surviving spouse.
Annual Gift Tax Exclusion:
A taxpayer can give $15,000 (for 2020 & 2021) & $16,000 for 2022 per person to any number of recipients in a calendar year without paying federal estate and gift tax. Gifts that qualify for this annual exculsion are never taxed--no gift tax is owed when the gift is made, and the gift is not taxed at death. If a gift is over $15,000 (for 2020 & 2021) & $16,000 in 2022, only the excess is a taxable gift. The annual exclusion is indexed for inflation and will change again when cost of living adjustments reach the next $1,000 multiple.
Present interest required: To qualify for the annual exclusion, a gift must be a present interest--the recipient must have all immediate rights to the use, possession, enjoyment and income of the property. The annual exclusion does not apply to a future interest--The recipient's rights to benefit from the property begin at some future date. Most gifts to trusts do not qualify for the exclusion because they are gifts of future interests. Exceptions include gifts to a minor's trust and gifts to a trust that includes a Crummey Power.
Gifts from married couples: Each spouse has an annual exclusion. Couples can therefore transfer a combined total of $30,000 (for 2020 & 2021)' $32,000 in 2022 to a single recipient each year.
Gift Splitting: If a gift in excess of $15,000 (for 2020 & 2021) & $16,000 in 2022 is made by only one spouse, the couple can use both annual exclusions by filing gift returns electing to split gifts. A gift-splitting election applies to all gifts made by the couple in a calendar year and attributes one-half of each gift to each spouse.
Qualified Transfers--Tuition and Medical Care:
Direct payment of medical expenses or tuition for another person is not a gift for gift tax purposes. Payment must be made to the school or medical provider and not to the beneficiary. Qualified transfers are not reported on Form 709. Payments for books, supplies, dormitory fees and board do not qualify. Tuition for part-time students qualifies. Medical payments can cover any type of expense deductible for income tax purpoes, including payment of insurance premiums. The beneficiary of a qualified transfer does not need to be related to the taxpayer. In addition, an annual exclusion gift can be made to the beneficiary of a qualfied transfer.
Most transfers to a spouse qualify for the marital deduction and pass to the spouse tax free. Gifts that fully qualify for the deduction do not need to be reported on a gift tax return.
--Noncitizen. Generally, gifts to a noncitizen spouse do not qualify for the marital deduction. Such gifts qualify for the annual exclusion of $15,000 (for 2020 & 2021) if the gifts that exceed $15,000 (for 2020 & 2021) would qualify for the marital deduction if given to a citizen spouse.
--Certain Terminable Interests. A terminable interest is one that ends at death or on the occurrence of some other specified event (life estates, annuities, income interest in a trust etc). Generally, a gift of a terminable interest is not deductible if the donor also gave an interest in the property to a third person who will possess or enjoy the property after the spouse's interest ends. This rule prevents one spouse from using the other as a conduit to pass a tax-free gift to another beneficiary. Interests that terminate entirely without passing to a third person are generally deductible (tenancies by the entirety, joint tenancies exclusively between spouses, and joint and survivor annuities). Terminable interest that will be taxed to the estate of the recipient spouse also qualify for the marital deduction.
There is an unlimited charitable deduction for the value of property transferred during life or at death for most charitable and public purposes. Gifts and bequests to lodges, amateur sports organizations, veterans groups and tribal governments may not qualify for the deduction. Unlike the income tax deduction, most gifts to foreign charities qualify for the estate and gift tax charitable deduction.