Year-End Estate Tax Planning

Estate tax planning? With the federal estate tax exemption now at $5.34 million and likely to be even higher in 2015, few taxpayers need to plan for federal estate taxes. That’s especially true if you’re married because so-called exemption “portability” between spouses effectively gives couples the ability to bequeath up to $10.68 million to their loved ones in 2014, free of federal estate tax. Federal estate tax planning still can be extremely important for wealthy families, particularly those who control a closely held company they’d like to keep in the family, but such families probably need a fairly complex plan, one that might take many months to develop and approve.


Nevertheless, year-end estate tax planning can be helpful for many people, depending on where they live. Many states have estate or inheritance taxes, including some with exemption amounts far below $5.34 million. In such states, basic planning might save your heirs many thousands of dollars. Moreover, there is no guarantee that Congress won’t lower the federal estate tax exemption in the future, so steps you take now might protect your descendants in the future.


Tackling the gift tax

Giving away assets you’re not likely to use is one straightforward method of trimming your taxable estate. In 2014, the annual gift tax exclusion amount is $14,000. That means you can give up to $14,000 worth of assets to any number of recipients, with no tax consequences.

Example 1: Eve Drake gives $14,000 to her son Craig, $14,000 to her daughter Brenda, and $14,000 to her old college roommate who has fallen on hard times. These gifts remove $42,000 from Eve’s estate yet she doesn’t even have to file a gift tax return, assuming she has made no other gifts to these individuals in 2014. Eve could make 10 such gifts, or 20 such gifts or even more, if she wished, tax-free.

To qualify for the 2014 gift tax exclusion, checks must be cashed before the end of the year. Therefore, it’s better to make such gifts well before December 31. If you write a check to someone who deposits\ it next January, that will be covered by the 2015 gift tax exclusion and you won’t be able to make a different 2014 gift to that individual, covered by this year’s exclusion.

Paired planning

The $14,000 annual gift tax exclusion is per person, so a married couple effectively can give up to $28,000 to each recipient this year, free of gift tax. Each spouse can make gifts up to $14,000 per recipient or one spouse can make the $28,000 gifts from a joint account. Even if only one spouse wants to make the double gift, that can be done with a process known as gift splitting.

Example 2: Eve Drake, who is married to her second husband Brett, would like to make gifts exceeding $14,000 to her children from her first marriage this year. Brett is not willing to contribute to the gifts but is willing to let Eve use his annual exclusion. Therefore, Eve gives $28,000 of her own money to her son and $28,000 to her daughter. Eve can file a gift tax return (IRS Form 709), on which Brett gives his consent to split gifts, so Brett has made a $14,000 gift to each person for tax purposes, if not in reality. This consent means that all gifts made by Eve or Brett during the calendar year will be split, for tax purposes.

Over the limit

What if Eve makes larger gifts—say, $30,000 to both of her children? Chances are that she won’t have to pay gift tax because there’s a $5.34 million lifetime gift tax exemption.

Example 3: Eve gives $30,000 to her son and $30,000 to her daughter in 2014. When Eve files a gift tax return, the first $14,000 of both gifts is covered by the annual exclusion, but the other $16,000 of both gifts—$32,000 altogether—is covered by her lifetime exemption. Assuming that Eve has not made over $5.34 million of such countable gifts, she won’t owe gift tax. However, at Eve’s death, all such countable gifts will be subtracted from that year’s estate tax exemption, so her estate may owe estate tax at a 40% tax rate on bequests over the exemption limit.

This example illustrates what might happen if appreciated assets are given to children or parents for sale in a lower tax bracket, as described in this issue’s article about family tax planning. Even if you give $50,000 or $100,000 worth of assets to a single individual, it’s unlikely you’ll owe gift tax. You’ll have to file a gift tax return and your lifetime gift/ estate exemption will be reduced, but you or your estate may not actually owe any tax, if today’s generous exemptions remain in effect.

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