How the Estate Tax, Gift Tax, and GST Apply to Your Estate Plan
andrew • October 27, 2022
“
The United States has taxed the estates of decedents since 1916
.” The form of this tax has changed over the years, but currently, the estate tax is only levied against the value of an estate (subject to certain deductions) that exceeds the “estate tax exemption.” For 2022,
the estate tax exemption amount
is $12,060,000. This exemption amount has increased exponentially over the last 10-15 years, with the estate exemption sitting at only $1,000,000 in 2007.
Not all estate transfers are included in the value of the estate for estate tax purposes. For example, transfers to a surviving spouse, charity, or to support a minor child are not included in that total. Additionally, estates may deduct debts, funeral expenses, legal and administrative fees, charitable bequests, and estate taxes paid to states. The taxable estate equals the gross estate less these deductions.
Any value of the estate above $12,060,000 is generally taxed at 40%.
The exemption level is portable between spouses, making the effective exemption for married couples double the exemption for singles. For example, if the first spouse to die bequeathed $5 million to children and grandchildren, the survivor’s exemption would increase by the unused $7.04 million, and they would have $19.12 million to transfer estate tax free.
There are some special provisions that reduce the estate tax, or spread them over time, for family-owned farms and closely held businesses. For example, family-owned businesses can claim valuation discounts if the business is to be divided between many heirs. When farms or family businesses make up at least 35% of a gross estate, taxes can be paid in installments over 14 years with interest only due during the initial five years.
Certain estates may also benefit from a stepped up basis on real estate assets that have appreciated since their acquisition. qualify to substantially reduce the taxable value of their real estate.
Not all estate transfers are included in the value of the estate for estate tax purposes. For example, transfers to a surviving spouse, charity, or to support a minor child are not included in that total. Additionally, estates may deduct debts, funeral expenses, legal and administrative fees, charitable bequests, and estate taxes paid to states. The taxable estate equals the gross estate less these deductions.
Any value of the estate above $12,060,000 is generally taxed at 40%.
The exemption level is portable between spouses, making the effective exemption for married couples double the exemption for singles. For example, if the first spouse to die bequeathed $5 million to children and grandchildren, the survivor’s exemption would increase by the unused $7.04 million, and they would have $19.12 million to transfer estate tax free.
There are some special provisions that reduce the estate tax, or spread them over time, for family-owned farms and closely held businesses. For example, family-owned businesses can claim valuation discounts if the business is to be divided between many heirs. When farms or family businesses make up at least 35% of a gross estate, taxes can be paid in installments over 14 years with interest only due during the initial five years.
Certain estates may also benefit from a stepped up basis on real estate assets that have appreciated since their acquisition. qualify to substantially reduce the taxable value of their real estate.
state death or estate taxes
Only thirteen states
levy their own estate taxes in addition to the federal estate tax. These states have a wide range of minimum thresholds, with Massachusetts at $1,000,000 and the District of Columbia at $5,600,000. Colorado does not levy its own estate tax.
gift tax
Congress enacted the gift tax in 1932 to prevent circumvention of the estate tax simply by gifting assets away just before death. The gift tax has the same limits as the estate tax, and any gifts that count towards your gift tax exemption also apply to your estate tax exemption. Currently, the gift and estate tax exemption is $12.06 million for an individual and $24.12 million for a married couple. Beyond these exemption amounts, donors pay gift tax at 40%, just like the estate tax.
One noteworthy difference between the estate tax and the gift tax is that an individual is permitted to gift $16,000 each year (indexed for inflation in $1,000 increments), with the exclusion granted separately for each recipient. Therefore, a married couple with four children could give their children a total of $128,000 each year ($15,000 from each parent to each child) without owing tax or counting those amounts toward the lifetime exemption amounts. Gifts received are not taxable income to the recipient.
One noteworthy difference between the estate tax and the gift tax is that an individual is permitted to gift $16,000 each year (indexed for inflation in $1,000 increments), with the exclusion granted separately for each recipient. Therefore, a married couple with four children could give their children a total of $128,000 each year ($15,000 from each parent to each child) without owing tax or counting those amounts toward the lifetime exemption amounts. Gifts received are not taxable income to the recipient.
Generation skipping tax
The Generation Skipping Tax, or GST tax, like the gift tax was enacted to stop individuals and families from dodging the estate tax by simply devising their assets directly to grandchildren or great-grandchildren, or using successive life estates in property to avoid taxable transfers. The GST prevents this by taxing gifts above the exemption at the 40% rate applied for the estate and gift taxes.
Conclusion
Even if estate, gift, or GST taxes won’t apply to your estate, there are still a number of benefits to diligently planning the distribution of assets upon your death. These benefits include easing the burden of managing your estate for loved ones (including by avoiding probate court), ensuring that assets go to whom you want them to, protecting assets from creditors, and establishing structured distribution plans for young children or grandchildren.
what next?
If you think it might be time to think through your estate plan, you can:
- Give us a call at 720-821-7604 to schedule a "Discovery Session" at which we can determine whether our firm would be a good fit for your needs. Or fill out our contact form to have us call you.
- Visit our estate planning page to learn more about how proactively thinking through your estate plan can protect you and your family, minimize hassle, lower the chance of family discord, and minimize or eliminate taxes.
- Learn more by reading our blog or watching our videos .
Wondering if you can use a deceased parent’s debit card to pay their final bills? Learn why doing so can cause legal trouble and how proper estate planning helps.
Think writing a will keeps your estate out of court? Learn why a will does not avoid probate in Colorado and how proper planning protects your family’s legacy.
Learn what documents you need for medical incapacity in Colorado, including medical powers of attorney and living wills. Contact The McKenzie Law Firm, LLC today.
Learn how to choose a successor trustee for your Colorado estate plan. Discover key tips to protect your family and manage assets smoothly in the Denver metro area.
Discover why a residuary clause in a will is essential to protect unlisted assets like homes and retirement accounts from probate court in Colorado.
Discover the essential powers of a successor trustee in Colorado, from managing investments to covering healthcare costs, and how to protect your family's assets.
Wondering what "per stirpes" means in a will or trust? Learn how this legal term divides your estate by family branches to protect your loved ones in Colorado.
Wondering which assets must go through probate in Colorado? Learn how real estate, bank accounts, and investments are handled and how to protect your family.
Discover what per stirpes means in estate planning and how this simple choice protects your children and grandchildren. Learn more from The McKenzie Law Firm.
Discover the difference between per capita and per stirpes in estate planning to ensure your family inheritance is distributed according to your true intentions.