Federal Gift and Estate Tax essay basics

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Federal Gift and Estate Tax essay basics

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Federal Estate Tax Exemption
$5.34 million in 2014.

For estates of decedents dying in 2014, if decedent’s “gross estate” is less than $5.34 million, decedent’s executor doesn’t have to file an estate tax return.

Unlimited marital deduction under both gift tax and estate tax.
Any property passing into the spouse’s outright ownership (gift, will, intestacy, life insurance proceeds, etc.) qualifies for a marital deduction.

For example:
Wendy dies leaving a gross estate valued at $8,000,000. Wendy’s will bequeaths 1/2 of her estate to Horace, and the other 1/2 to a trust for her children.
= Wendy’s executor must file an estate tax return, but no estate tax will be due:

$8,000,000 Wendy’s gross estate
<4,000,000> marital deduction for property passing outright to Husband
= $4,000,000 taxable estate (less than $5.34 estate tax exemption)
= $0 federal estate tax

There is also a $5.34 million exemption under the federal gift tax.
As a result, no gift tax must be paid by a donor unless cumulative lifetime taxable gifts (i.e. the total of all taxable gifts for this year and all prior years) exceeds $5.34 million.

Example:
Martha makes gives $2 million to her son. Martha has never made taxable gifts to anyone in prior years. Martha must file a gift tax return reporting a taxable gift of (2,000,000 – 14,000 annual exclusion) = $1,986,000 but doesn’t have to pay any gift tax.
On Martha’s death, the taxable gift will come into any estate tax computation at its date-of-gift value, as an “adjusted taxable gift,” BUT if the total value of (1) gross estate plus (2) adjusted taxable gifts is less than $5.34 million, no estate tax will have to be paid.

Life insurance paid on death
Life insurance proceeds are includible in the insured’s gross estate for estate tax purposes, because the insured owned the policy.

Life insurance paid on death is subject to estate tax, but it is not subject to income tax for the beneficiary because it is excluded from the definition of gross income.

If policy is community property, 1/2 is included in insured decedent’s gross estate.

$14,000-per-donee annual exclusion under the gift tax.
The exclusion is available for gifts of present interests, but not for gifts of future interests.

Example: If Joe gives $14,000 each to his three children, their spouses, and his four grandchildren (a total of 10 donees), Joe can deplete his estate by $140,000 without having to file a gift tax return, and without having made a taxable gift that uses up any of Joe’s $5.34 million gift tax exemption.

A gift tax return has to be filed only if taxable gifts (over annual exclusions) are made during the calendar year.

There is an unlimited exclusion for tuition and medical payments if (but only if) the payment is made directly to the service provider.
The tuition or medical payment must be made directly to the service provider (college, hospital), not to the person to reimburse them after they made the payment.
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Revocable gifts are “incomplete” gifts.
If revocable, the gift is “incomplete” for gift tax purposes- as a result, the donor does not have to file a gift tax return with respect to the transfer, until it becomes irrevocable.

Bottom line: revocable gifts are useful planning arrangements, but they don’t save taxes.

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