It is that time of year again when we wait in anticipation . . . no, not for scrumptious holiday treats . . . but for the Internal Revenue Service (IRS) to release the amount you can pass estate tax free upon your death (the Unified Credit Against Estate Tax) and the amount you can pass to any person gift tax free (Annual Exclusion). Although we may be stretching the level of anticipation, many will wonder what will happen to their family, their farm, and their small business when they pass away. How will their children afford to keep the business running while facing a hefty estate tax bill? How large will the estate tax bill be? How much can I gift my children next year without paying taxes?
In a nutshell, the IRS sets an amount every year that you may pass "estate tax free" upon your death. Whatever that amount is the year you die, is the amount you may pass onto your loved ones without incurring any taxes. Imagine everything you own fitting in one bucket, what is the value of that bucket? If the value of your bucket exceeds the amount you are allowed to pass estate tax free, then your estate will incur a 40% federal estate tax on the amount that is spilling over. Also, if you tried to give some assets in your bucket away during life and those assets exceeding the amount you were allowed to gift each year, the IRS will give you a smaller bucket to reflect the past gifting.
In other words, the Federal Estate Tax is a tax on your right to transfer property upon your death. The value of your estate for federal estate tax purposes is determined by taking your Gross Estate, minus any deductions, plus any lifetime taxable gifts. Your Gross Estate includes the fair market value of all of your property (cash, securities, real estate, life insurance, annuities, business interests, and all other assets you own) as of your date of death. Your taxable estate is then determined by taking your Gross Estate minus any eligible deductions (mortgages, estate administration expenses, property passing to qualified charities, etc.). Then, the value of any lifetime gifts that exceeded the Annual Exclusion for Gifts (the amount you can gift to any person gift tax free) in the year the gift was made is added to your Taxable Estate. If the value of your Taxable Estate exceeds the unified credit amount, then that amount in excess will incur a 40% federal estate tax.
So is the IRS in a gifting mood this year? Unfortunately, Santa’s elves packed his bag a little light this year. The Unified Credit Against Estate Tax in 2017 is $5,850,000 per person; a slight increase from last year. Further, the Annual Exclusion for Gifts in 2020 will be $15,000 per person. Although we did not see the increase we all put on our Christmas list, the Unified Credit is still the highest it has been in the last decade.
So enjoy the time with your loved ones and feel confident and secure that your Swier Law Firm estate plan will pass on your legacy. If you have not completed your will or trust or planned for a disability, help protect your loved ones today by coming in to meet with us and discuss your options.