gift and estate tax basics

GIFT AND ESTATE TAX BASICS

TAX AVOIDANCE STRATEGIES

ESTATE PLANNING GOALS

One common goal of estate planning is tax avoidance

To understand why tax avoidance strategies are commonly employed

in estate planning you need to understand how gift

and estate taxes work first

WHAT IS THE GIFT AND ESTATE TAX

All gifts made during your lifetime, as well as all assets owned by you at the time of death, are potentially

subject to gift and estate taxes

Anything you give away for which you do not receive full consideration in return is a gift

Certain types of gifts are excluded

Because of the lifetime exemption and yearly exclusion most gifts of small value are not

actually taxed

Value of lifetime gifts plus value of assets owned at death are added together and then

potentially taxed

GIFT AND ESTATE TAX RATE

Historically fluctuated every few years

American Taxpayer Relief Act of 2013, or ATRA, permanently set the gift and estate tax

rate at a maximum of 40 percent

UNLIMITED MARITAL DEDUCTION

The unlimited marital deduction allows a taxpayer to transfer assets

of unlimited value to a spouse during the taxpayers’ lifetime or at the time of death without incurring

gift and estate taxes

For illustration purposes, imagine that Thomas and Ellen are married at the time of Ellen’s death on January 1st, 2014

Ellen owned assets valued at $5 million when she died and made a total of $2 million worth of

qualifying gifts during her lifetime

Thomas also owns $5 million in assets

Ellen can leave all of the assets she owned at the time of her death to Thomas without Ellen’s

estate having to worry about gift and estate taxes

Thomas’s estate may be overfunded though after the gift

THE LIFETIME EXEMPTION

Each taxpayer is entitled to exempt a specific amount of gifts and

assets over the course of a lifetime from gift and estate taxes

Lifetime exemption has fluctuated wildly over the years

ATRA set it at $5 million, adjusted for inflation each year

Exemption amount is $5.34 million for 2014

Thomas now has an estate valued at $10 million

$4.66 million would be taxed at 40 percent

Thomas’s estate would owe $1,864,000 in estate taxes

PORTABILITY

ATRA also made the concept of portability permanent

Allows taxpayer to use any unused portion of a spouse’s lifetime exemption

Thomas could exempt an additional $3.34 million by using Ellen’s unused exemption

Thomas cannot use the full $5.34 million because Ellen made lifetime gifts valued at $2

million

Brings Thomas’s taxable estate down to just $1.32 million

Brings the tax liability down from $1,864,000 to just $528,000

THE ANNUAL EXCLUSION

The annual exclusion allows each taxpayer to make gifts valued at up to $14,000 (for 2014) to as many

beneficiaries as the taxpayer wishes each year without incurring

a gift tax

Married couples can combine gifts (gift-splitting) to gift assets valued

at up to $28,000

Annual Exclusion gifts do not count toward the

LIFETIME EXEMPTION LIMIT

Assume Thomas lives an additional ten years

Assume Thomas used the annual exclusion to make yearly gifts to the couple’s three children

and five grandchildren

Thomas could annually gift $112,000 for a total of $1.12 million tax-free

Brings his taxable estate down to just $200,000

Tax obligation is now just $80,000

By employing gift and estate tax avoidance strategies the amount of tax due on Thomas’s estate was reduced

from $1,864,000 to $80,000, a savings of $1,784,000 –

money that will go to Thomas and Ellen’s loved ones instead of to the IRS

Had they started earlier they might have been able to avoid gift and

estate taxes entirely

LEARN MORE ABOUT FEDERAL AND ILLINOIS

GIFT ESTATE TAX

Click to visit: www.NashBeanFord.com

445 US Highway 6 East, Geneseo, IL 61254Phone: (309) 944-2188

5030 38th Street, Suite 2, Moline, IL 61265Phone: (309) 762-9368