2017 Estate & Gift Tax Update
While 2017 brings only incremental increases in the Federal exclusion
amounts for bequests and lifetime gift-giving, the significant changes
in, and uncertainty about, exclusion amounts over the past 5-10 years
warrant careful review of tax planning provisions in older estate
planning documents.
Estate & Gift Tax Exclusion Amount
The
federal exclusion amounts for bequests and lifetime gift-giving
continue to increase slightly, as adjusted for inflation. For
2017, the federal estate tax exclusion amount is $5.49 million per
person (up from $5.45 million in 2016). 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
$5.49 million are taxed at a maximum rate of 40%.
Generation-skipping gifts in excess of $5.49 million are taxed at an
(additional) maximum rate of 40%.
There is currently no state inheritance, estate or gift tax in North Carolina.
Review of Estate Planning Documents for Outdated Provisions
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 $675,000. This change has
resulted in many outdated estate plans, and much of the tax-avoidance
attention in estate planning (for estates less than the exclusion
amount) 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. In general, it
is recommended that estate planning documents be reviewed on a regular
basis and whenever one experiences significant life changes -- or
changes in dispositive wishes. It may also be important to review
estate planning documents (particularly those drafted prior to 2013) to
make sure the tax planning contained in earlier documents does not
unnecessarily increase income tax liability or otherwise frustrate your
intent under current tax laws.
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 (the amount since 2013). 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 2017. (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 $149,000 in 2017, up
from $148,000 in 2016. 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
an individual 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 to the individuals. Because certain qualifications may
apply, it is recommended that you consult your tax advisor before making
particular charitable gifts or payments on behalf of others. Your
tax advisor can also advise as to whether your charitable gifts are
deductible on your income tax returns.
Personal Update Reminder
As
you contemplate your gift plans for 2017 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?"
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