There are three aspects to federal estate taxes that make up the Unified Transfer Tax: Estate Taxes, Gift Taxes, and Generation-Skipping Transfer Taxes. Prudently planning your estate plan to avoid or minimize these taxes is essential.

The $5 million Federal Estate tax exemption is now permanent, and is indexed for inflation. In 2013, the federal estate tax exemption was $5.25 million, 2014 was $5.34 million, 2015 was $5.43, 2016 was $5.45 million, and for 2017 is $5.49 million. The federal estate tax exemption, the lifetime gift tax exemption, and the generation-skipping transfer tax are unified. This means that an individual who dies in 2017 may pass a total of $5.49 million in gifts during her life, after death, or a combination of the two, without incurring federal estate tax. A married couple who adheres to specific requirements at the death of the first spouse may pass two times this amount (a total of $10.98 million in 2017). An individual may make gifts not to exceed the annual gift tax exclusion amount of $14 thousand per donee, per year, without having to file a gift tax return and without any federal tax consequence. A married couple may double this annual gift tax exclusion amount and make gifts of $28 thousand per donee, per year, without having to file a gift tax return. Additionally, a spouse may make unlimited marital gifts to his or her spouse during their lifetimes. However, if an individual makes gifts during the year to a non-spouse donee in excess of the gift tax exclusion amount, this excess amount will be reduced from the amount that individual may pass free of federal estate tax at death. For example, if Martha, a single woman, gives a gift to her daughter of $14 thousand in one year, no gift tax return must be filed, and the amount Martha may pass to her beneficiaries at death without incurring federal estate tax liability will not be reduced. If Cathy and her husband give gifts totaling $28 thousand to their neighbor, daughter, or both, in one year, no gift tax return must be filed. On the other hand, If Martha gives a gift of $50 thousand one year to either her daughter or her neighbor, Martha must file a gift tax return and the amount she can pass to her beneficiaries free of federal estate tax will be reduced by $36 thousand. Thus, if Martha dies the following year, her $5 million exemption that she can pass free of federal estate tax (indexed for inflation) will be reduced by $36 thousand.

The Generation Skipping Transfer Tax is a tax on property passing from one generation to an individual or individuals that are two or more generational levels below the transferring generation. For example, this would apply to a grandparent leaving property to her grandchild or from one person to an unrelated individual who is 37.5 years younger than the transferor.

Income Tax Planning and Charitable Giving Strategies

Because of the unified credit and the corresponding tax exemption amounts, only the wealthiest families incur these types of tax liability. Conversely, every family may benefit from creating an estate plan that takes income tax liabilities into consideration. Some common types of charitable giving strategies that provide income tax benefits during the lifetime of the grantor are pooled income funds, private foundations, Charitable Gift Annuities, Charitable Remainder Annuity Trusts, and Charitable Remainder Unitrusts.

Two very popular strategies, Charitable Remainder Annuity Trusts and Charitable Remainder Unitrusts, have many similarities, and both allow for a retained interest by the grantor while providing other tax incentives. They both are created by transferring money or property during lifetime to an irrevocable trust. There are no gift tax consequences for transferring this property to the irrevocable trust. The grantor may contribute appreciated property without paying capital gains tax. The grantor gets to keep an income stream for lifetime (plus one other lifetime if the grantor wishes). The grantor gets a current income tax deduction for the amount that will go to a charity after death and can carry an unused deduction amount forward for up to 5 years. Because it is a charitable gift, there is an unlimited estate tax deduction.
Karen S. Keaton, Esq. works with corporations, partnerships, limited liability companies, joint ventures, physician groups, individuals, and families. She earned an LL.M in Taxation from the Levin College of Law at the University of Florida. Her knowledge of the Internal Revenue Code, Treasury Regulations, and Private Letter Rulings allow her to create the most comprehensive estate plan, including reduction or elimination of tax liability through effective charitable giving, corporate entity structuring, and other tax strategies. She will create a plan that benefits your family or business through the minimization of tax liability and maximization of income by taking advantage of the tax laws currently in place.