Estate Tax Planning

The Estate Tax (commonly known as the “Death Tax”) is generally based on the value of the decedent's estate at the time of death. The Estate Tax is paid by the estate before distributions are made to beneficiaries. Unlike incomes taxes, due to the complex rules and higher levels of liability, estate tax returns are usually prepared by your attorney and not your CPA.

There are a variety of strategies that can result in significant estate tax savings for your family is used properly.

In 2011, the IRS introduced the concept of portability. This allows a surviving spouse to get credit for the unused portion of the deceased spouse's exemption amount under certain circumstances. This is done by filing a federal estate tax return at the death of the first spouse, even if one is not otherwise required. This allows the survivor to benefit from a potential $10.64 million exemption amount which can vastly reduce the amount of estate tax that would be owed. Portability can also be employed to insulate the estate from potential future changes in the estate tax.
Federal Estate Tax:
The Federal Estate Tax will continue to be a political football. In the last 5 years alone, the tax has been phased out, repealed, reinstated and made permanent with annual adjustments for inflation. Seemingly every budget debate contains rhetoric proposing to do everything from reducing the exemption amount to $1 million dollars to permanently repealing the tax entirely.

Effective January 1, 2014, the Federal Estate Tax exemption amount is $5.34 million dollars. This means that any “estate” valued less than $5.34 million dollars is not subject to the tax, while an estate greater than that amount is subject to the tax. The current tax rate is 40% of the excess.

However, even if your estate is less than $5.34 million dollars, there are several important planning considerations to take into account.

Reportable Gifts:
There are two important numbers to remember when it comes to the topic of gift tax: 1) The annual exclusion amount and (2) the lifetime exemption amount.

Current law states that gifts exceeding $14,000 per beneficiary, per year must be reported to the IRS on an annual basis (Form 709). This is known as the annual exclusion amount and is only a reporting requirement. Annual gifts less than $14,000 are excluded from this reporting requirement.

Gift tax is not owed until the total value of gifts made in excess of the annual exclusion amount exceed the lifetime exemption amount, which is currently $5.34 million dollars. By law, the lifetime gift exemption amount and the estate tax exemption amount are the same.

So it is important to remember that reportable gifts also count against your estate tax exclusion amount.

Federal Gift Tax:
In 1977, Congress created the Unified Gift and Estate Tax System that effectively combined the Gift Tax and the Estate Tax. What this means is that the value of your estate for the purposes of the Federal Estate Tax includes not only the value of assets under your control at the time of death but also the value of all reportable gifts made over your lifetime.
Ohio Estate Tax:
Ohio repealed the Ohio Estate Tax as of January 1, 2013. Will it be permanent? That is anyone's guess, but for now, there will be no Ohio Estate Tax in the future.

Ohio Estate Tax may STILL BE DUE for those who died prior to January 1, 2013 if the value of their estate at death plus any gifts made within three years of death was greater than $338,333.

Visit Us On FacebookVisit Us On Twitter