Federal Gift and Estate Tax essay basics
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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.
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
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 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.
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.
Bottom line: revocable gifts are useful planning arrangements, but they don’t save taxes.