Estate and Gift Tax. With the new high exemptions, most people will no longer be subject to the federal estate tax, but this fact should not be interpreted to mean that planning is not necessary. Federal estate, gift and GST taxes are but one component of the myriad of issues addressed in the estate planning process Estate Planning. In addition, many states including Maryland now impose state estate tax, and the state estate tax exemption, if any, may be much lower than the federal exemption. The most common state estate taxes are based on a specified percentage of the federal estate tax. Many practitioners have shifted their planning focus to Capital gains tax on assets held within an estate or trust.
The gift, estate, and GST tax exemptions were set at $5 million in 2011. The exemptions are indexed for inflation, resulting in exemptions of $5.49 million for 2017. An individual can transfer property with value up to the exemption amount either during lifetime or at death without paying any transfer tax. In other words, any portion of the exemption used during lifetime reduces the amount of exemption available at death for estate tax purposes. For example, if you made a lifetime taxable gift of $2 million in 2013, your remaining exemption amount that could be used by your estate at your death would be $3.49 million ($5.49 million 2017 inflation adjusted exemption, less the $2 million lifetime gift). The GST exemption essentially allows the earmarking of transfers, made during lifetime or at death, that either skip a generation or are made in trust for multiple generations. Certain gifts are not applied toward the exemption, such as “annual exclusion” gifts and direct payments to medical or education providers, and can be made completely tax-free.
Transfers between spouses and to certain trusts for spouses, made during lifetime or at death, may be made without the imposition of any tax. These transfers also do not use any exemption. This is known as the “unlimited marital deduction.”
The $5 million inflation adjusted estate tax exemption is “portable” between spouses beginning 2011 so that a surviving spouse may take advantage of a deceased spouse’s unused exemption (DSUE) through lifetime gifts by the surviving spouse, or at the surviving spouse’s later death.
This means that no transfer tax is assessed on estates up to $5.49 million for individuals and $10.98 million for married couples, assuming no lifetime gifts other than annual exclusion gifts or certain transfers for educational or medical expenses were previously made.
Inheritance This type of tax on the right to inherit a bequest has largely been phased out throughout the country. However, Maryland is a state that still has a tax but there are many exemptions including those for close relatives and charities. For example, nieces and nephews are subject to the tax so a bequest or gift to an adult sister or brother should be considered.
Income taxes are important issues and must be dealt with from both: 1. a planning perspective, often with focus on capital gains, and 2. A bookkeeping and reporting focus with fiduciaries such as personal representatives and trustees being responsible for tax reporting issues. Estates have two levels of income tax returns on the last year of death, and they result in an income tax filing related to the time period from January 1 to date of death and a separate fiduciary income tax filing for the time period date of death forward.