The New Federal Tax Law – Good News for Lifetime Gifting and Your Estate!

This third installment in our series concerns the new federal tax law (signed into law in January 2013) as it applies to taxes on gifting and estates.  In summary, the new law makes permanent a unified exemption of $5 million (adjusted for inflation annually) on your “lifetime gifting” and “estate.”  So how does this work?   As of 2013, there is

–  a lifetime gift tax exemption of $5 million (adjusted for inflation annually).  This means that, over your lifetime, you can give away up to $5 million without incurring any federal gift tax.  Any gift above the $5 million exemption will be taxed at 40% (up from 35% under the previous tax law).  Please note, any gifts you give during your life that use any portion of this lifetime exemption will reduce the amount that you can leave “federal estate tax free” under your estate tax exemption (see below).

–  an estate tax exemption of $5 million (adjusted for inflation annually). This means that up to $5 million is exempt from federal estate taxes.  After the $5 million exemption, the estate tax rate is 40% (up from 35% under the previous tax law).  As mentioned above, any gifts you give during your life that use any portion of the lifetime gift tax exemption will reduce the amount that you can leave “federal estate tax free” under your estate.

“portability.”  The new law makes permanent a previous tax law provision that is very helpful for widows and widowers.  Specifically, if a spouse dies, and his/her estate does not use up the entire estate tax exemption amount, then the surviving spouse can add that “leftover” amount to his/her estate tax exemption.  For example, if the “first to die” spouse leaves an estate of $2 million, then the surviving spouse has the ability to use the remaining $3 million plus the survivor’s $5 million.  However, it should be noted that “portability” is not automatic, and it requires that the Executor or other legal representative of the surviving spouse file this election.

– One final point.  It is important to note that there are gifts you can give during your life that don’t count against the lifetime gift tax exemption.  These are called annual exclusion gifts and they too are “federal tax free.”  Specifically, you can give someone up to $14,000 annually without any impact on your $5 million lifetime exemption.  So, for example, if you and your wife have a married daughter and two grandchildren, you can each give $14,000 annually to your daughter, your son-in-law, and each of your grandchildren.  Do the math – that’s a total of  $112,000 that you and your wife can give to your daughter and her family annually without touching the lifetime gift tax exemption.  Only gifts that exceed the annual exclusion count against the lifetime exemption.

Tax law is complicated.  In order to best understand how the new federal tax law impacts your lifetime giving and estate planning options, it’s highly advisable to consult with an expert in the field.

Getting Legal Help

Experienced Estate Planning and Tax attorney, Elga Goodman, can help you understand the new federal tax law and how it applies to you.  She can work with you to evaluate your options and create lifetime gifting and estate plans that best reflect your wishes and the needs of your family.  Contact us today at 973-841-5111.

 

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