The federal government imposes taxes on free property transfers made during the lifetime (gifts) or in the event of death (bequests/devises) that exceed certain exemption thresholds. Gift taxes are lifetime transfer fees that exceed the exemption limits, and estate taxes are death transfer taxes that exceed the exemption limits. The generation-skipping transfer (GSTT) taxes apply to transfers to the most distant grandchildren and descendants who exceed the exemption limits, so transferors cannot avoid the next generation transfer taxes by "skipping "a generation. The GSTT tax also applies and does not replace the taxes on estate or gifts.
Gift, inheritance, and GSTT tax exemptions were $5 million in 2011. The exemptions are indexed to inflation, resulting in $5.12 million for 2012, $5.25 million in 2013, $5.34 million for 2014, 5.43 million dollars for 2015, $5.45 million for 2016, and $5.49 million for 2017. In December 2017, Congress increased tax exemptions for gifts, estate, and GSTT to $10 million by 2025. Inflated, these exemptions are $11.18 million for 2018; a person can transfer property up to the life or death exemption value without paying transfer taxes. In other words, any part of the exemption used during life reduces the amount of exemption available at the time of death for inheritance tax purposes. For example, if you made a taxable lifetime donation of $5 million in 2017, the residual exemption amount that your property could use at the time of your death would be $6.18 million ($11.18 million 2018 inflation-adjusted exemption, less the $5 million lifetime gift). The GSTT exemption allows, in essence, the assignment of transmissions, carried out for life or death, which skip one generation or are entrusted to several generations. Some gifts do not apply to exemptions, such as "annual exclusion" gifts and direct payments to health care providers, and maybe fully tax-exempt.
Transfers between spouses and to certain spousal trusts, whether in life or in death, can be made without the imposition of any tax. In addition, these transfers do not use exemptions. This is called the "unlimited marital deduction."
The inflation-adjusted $10 million inheritance tax exemption is "transferable" between spouses from 2011 so that a surviving spouse can benefit from the unused deceased spouse exemption through the lifetime gifts of the surviving spouse or, in the death of the surviving spouse.
This means that before 2026, no ownership transfer tax will be charged up to $11.18 million for individuals and $22.36 million for couples, assuming no previous lifetime gifts other than the annual or flat-rate transfers for study or medical expenses have been made.
It is imperative to note that there was no indexation to inflation of the transfer tax exemption prior to 2012. Given the high indexed base value of $10 million, the annual increases in the amounts of the exemptions are likely to be substantial, even when inflation is not particularly high. This will create new planning opportunities. First, a new major exemption will be available next year for taxpayers who fully use their exemption in any given year. Second, for the first time, the increase in exemptions will allow taxpayers whose wealth increases to be protected by the imposition of a transfer tax.
With the new high exemptions, most people will no longer be subject to federal estate tax, but this should not be interpreted that unnecessary planning is not needed. Federal taxes on property, gifts, and the GSTT are just one component of many issues addressed in the estate planning process. Additionally, many states now impose state property taxes, and the state property tax exemption can be much lower than the federal exemption. Most common state property taxes are based on a certain percentage of federal property tax. Some states impose an inheritance tax linked to the family relationship between the deceased and the beneficiary of the inheritance.
The skyrocketing numbers of Estate, Gift and GSTT Tax Exemptions
For the first time in a few years, the annual amount of the tax exclusion on gifts will drop from $15,000 to $16,000 per donor (or $32,000 for couples who choose to split gifts). The IRS recently announced. This adjustment will take effect for current interest-bearing gifts made on or after January 1, 2022.
The IRS also announced the annual inflation adjustment for federal gifts, estates, and GSTT tax relief, which increases the tax-protected amount from $11,700,000 in 2021 to 12 $060,000 on January 1, 2022.
This increase can be of particular concern to people who have already used any GSTT gifts, estate, or tax exemptions to facilitate large transfers for life. In the absence of congressional action, the exemption amount is expected to drop back to $5,000,000 adjusted for inflation on January 1, 2026, which we believe will be roughly half of the value of the current exemption.
The rate of gift, estate, and GSTT tax remains set at 40% for 2022 for taxable transfers exceeding the available exemption of the transferor.
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