2016 Estate & Gift Tax Update

Recent increases in the Federal exclusion amounts for bequests and lifetime gift-giving warrant reviewing existing estate planning documents.

Estate & Gift Tax Exclusion Amount
   The turn of the year brought new and higher federal exclusion amounts for bequests and lifetime gift-giving. For 2016, the federal estate tax exclusion amount is $5.45 million per person (up from $5.43 million in 2015, adjusted for inflation). This is also the current “unified exclusion amount” for the sum total of a person’s lifetime gifts (gifts in excess of the applicable annual exclusion amounts in effect when the gifts were made), together with the property passing to beneficiaries upon the donor’s death. This figure also represents the current exclusion amount for generating-skipping gifts (e.g., gifts to grandchildren). Estates (and/or lifetime gifts) in excess of $5.45 million are taxed at a maximum rate of 40%. Generation-skipping gifts in excess of $5.45 million are taxed at an (additional) maximum rate of 40%.

   There is currently no state inheritance, estate or gift tax in North Carolina.

Changes May Be Needed for Outdated Estate Planning Documents

   In contrast to the high current federal estate and gift tax exclusion amount, as recently as 2008 the exclusion amount was $2 million; in 2003 it was $1 million, and in 2001, it was only $675,000. This change has resulted in many outdated estate plans, and much of the tax-avoidance attention in estate planning has now shifted away from estate tax, focusing instead on income tax considerations -- including efforts to maximize stepped-up basis of appreciated assets and avoidance of capital gains.

Annual Exclusion Gifts & Spousal Gifts

   There is no change in the federal annual gift exclusion amount this year; it remains at $14,000 per donee. This exclusion allows an individual donor to give an unlimited number of “annual exclusion gifts,” so long as the amount of the gift does not exceed $14,000 per donee during calendar year 2016. (Generally, married couples can give $28,000 per donee as long as certain measures are taken.)

   Annual exclusion gifts do not use up any of a person’s lifetime “unified exclusion amount”, and generally no gift tax return is required. If you make a gift in excess of $14,000 to one donee, you may still avoid paying a gift tax on the excess by filing a gift tax return (IRS Form 709) and electing to use part of your unused unified lifetime estate and gift tax exclusion amount to cover the overage.

   As in years past, a person may give an unlimited amount to his or her spouse by using the “unlimited gift tax marital deduction,” as long as the donee spouse is a U.S. citizen. If the donee spouse is not a U.S. citizen, tax-free transfers to the non-citizen spouse are limited to a “super annual exclusion” amount of $148,000 in 2016, up from $147,000 in 2015. As with other gifts in excess of annual exclusion amounts, the donor spouse may avoid tax by filing a gift tax return and electing to use his or her unused exclusion amount to cover the overage.

   Keep in mind that all annual exclusion gifts and spousal gifts must be gifts of a “present” interest as opposed to a “future” interest, and further qualifications can apply. It is therefore recommended that you consult your tax advisor prior to making a particular gift.

Other Tax-Free Gifts

   Gifts to qualified charities may generally be made in unlimited amounts, gift tax-free. In addition, certain direct payments made on behalf of another are not considered “gifts” at all, and may be made in unlimited amounts. These include direct payments on behalf of another person to educational institutions for tuition and to medical providers for medical care. These payments must be made directly to the institutions or providers, however, or they will be treated as gifts.

Personal Update Reminder

   As you contemplate your gift plans for 2016 and review your current estate planning documents, consider also a review of your life insurance and retirement plan beneficiary designations to confirm (1) that the designations are what you think they are, (2) that they continue to conform to your current wishes; and (3) that the designations are properly coordinated with your estate plan as spelled out in your Will or Revocable Trust.

   You can find a more thorough discussion of beneficiary designations and common mistakes associated with them in "IRA and Life Insurance Beneficiary Designations: Time for a Tune-Up?"