Gift and Estate Taxes


What is the federal gift and estate tax?   

Generally, the federal government imposes a gift tax on any transfer of property by gift from a person that is a United States citizen or resident alien during the person’s life. The government also imposes an estate tax for the transfer of your property at your death.   Both the gift and estate taxes are subject to certain deductions, credits and exclusions.  Gift and estate taxes work in unison to catch transfers of your property during your life and upon your death.  Taxable gifts made after 1976 are added back into your estate prior to calculating estate taxes. Any amounts you previously paid in gift taxes are then subtracted from the estate taxes due. The estate tax is in addition to income tax and probate costs.

Generally, your estate will have to pay a federal estate tax if the net value of your estate plus prior taxable gifts exceeds the applicable exemption amount in the year of your death, subject to any deductions and exclusions. The following is a schedule of the amount of the estate tax exemption amount:

Year of Death Exemption Amount
2002 & 2003 $1,000,000
2004 & 2005 $1,500,000
2006, 2007 & 2008 $2,000,000
2009 $3,500,000
2010 $5,000,000, but may opt out of estate tax
2011 $5,000,000
2012 $5,000,000
2013 $1,000,000

For 2011 and 2012, the estate tax exemption is “portable,” meaning that, in the case of a married couple, if the exemption is not fully used in the estate of the first spouse to die, the remaining exemption may be used in the estate of the second spouse to die.  There are certain conditions and limitations on portability.  In addition, taxable lifetime gifts by the either spouse will reduce the amount of available exemption in his or her estate and could reduce the portability of the exemption to the second estate.

In addition to the estate tax exemption, an estate is entitled to a marital deduction for all gifts passing to the surviving spouse.  An estate is also allowed a deduction for gifts to charity.  There is no limit on the amount of either deduction.  There are numerous other deductions that may be available to an estate, including deductions for expenses of administration.

For 2011 and 2012, there is also an exemption of $5,000,000 available for lifetime taxable gifts.  In 2013, the current tax provisions expire and we revert back to the law as it existed in 2001, prior to the enactment of the “Bush Tax Cuts,” or a $1,000, 000 exemption.

Some of the same deductions available to estates, such as the marital deduction and charitable deduction, are also available for lifetime gifts.  In addition, certain types of gifts are excluded from the calculation of taxable gifts.  For example, direct payments of qualifying tuition expenses and medical expenses may be excluded from taxable gifts, but the payments must be made directly to the institution providing the services.  The most significant and often used exclusion is the annual exclusion.  Every individual is allowed to exclude up to $10,000 (indexed for inflation) in taxable gifts per donee or beneficiary per year.  Currently, the annual exclusion is $13,000 per donee or beneficiary.  As with all other exemptions, credits, deductions and exclusions, there are certain rules and limitations to the annual exclusion and certain gifts may not qualify for the exclusion.

Prior to making any significant gifts (other than incidental gifts of personal property), contact your accountant, attorney or other tax advisor to discuss any gift or estate tax implications.

Does North Carolina have a gift and estate tax?

The North Carolina legislature repealed the North Carolina gift tax for gifts made on or after January 1, 2009.  For gifts mad prior to 2009, a gift tax applied.  The rate of tax and availability of certain deductions and exclusions was determined by the identity of the recipient of the gift and his or her relationship to the donor of the gift.

North Carolina imposes an estate tax on the estate of a decedent when a federal estate tax is imposed on the estate and the decedent was either (1) a resident of North Carolina who owned property in North Carolina or property that has a tax situs (location) in another state or, (2) a nonresident who owned real property in North Carolina or personal property that has a tax situs (location) in North Carolina.  The amount of tax is equal to the federal credit for state death taxes as it existed prior to 2002.  Amendments to the Internal Revenue Code have eliminated the state death tax credit and replaced it with a deduction for state death taxes paid.

When planning for federal and North Carolina estate and gift taxes, it is highly advisable to consult with your attorney, accountant or other tax advisor.

What is included in my taxable estate?   

Your taxable estate includes all property in which you own an interest at the time of your death, including any property owned jointly with another person, including a spouse.  In the case of a spouse, each spouse is presumed to own one-half of the jointly owned property.  In the case of other co-owners, the rules are a little more complex and may require tracing of the amounts contributed by each of the co-owners.  Further, in the absence of proof as to the contribution of each co-owner, the deceased owner may be treated as owning the entire property.  Therefore, all jointly owned property should be carefully examined and considered in planning your estate.

Although determining what you own at your death may seem simple and intuitive, the concept of ownership for federal estate tax purposes is much broader than most people realize and can result in unwanted and unexpected taxes.  For example, you may transfer ownership of a policy of insurance on your life to a child or other family member with the intent that the proceeds not be included in your estate.  If, however, you retain a sufficient “incident of ownership” such as the right to change the death beneficiaries under the policy, the proceeds of the policy are included in your gross estate.  Given the federal government’s expansive view of the concept of ownership for purposes of the estate tax, planning to avoid the estate tax can be complicated and may require the assistance of an attorney, accountant or other tax advisor.

What are the tax rates for the federal gift and estate tax?   

For 2011 and 2012, the highest federal gift and estate tax rate is 35%.  In 2013, assuming Congress takes no action, the gift and estate taxes revert to the 2001 levels and a maximum rate of 55%

What is the generation skipping transfer tax?

The General Skipping Transfer (“GST”) Tax is essentially a federal tax imposed in addition to any estate or gift tax on gifts to grandchildren, great grandchildren and other beneficiaries who are considered to be more than one generational level below the decedent or other transferor.  The GST Tax was enacted to prevent individuals with larger estates from avoiding estate or gift tax by transferring property to beneficiaries across multiple generations.  There are exclusions and deductions available to offset or reduce the GST Tax similar in amount to those available for gift and estate tax.  However, the application of these exclusions and deductions depends on several factors including whether the transfer is in trust and planning for the GST Tax is very complicated.  If you are considering gifts to grandchildren or more remote beneficiaries, you should consult with your attorney, accountant or other tax advisor to determine how best to reduce or eliminate any potential GST Tax liability for your estate.

Will my estate be subject to estate or gift tax and, if so, what can I do to avoid the tax?   

The answer to this question depends on when you die and whether Congress acts to extend the current law beyond 2012, both of which are difficult to predict.  The current gift, estate and GST tax provisions expire on December 31, 2012, and the rates and exclusions that were in effect in 2001 prior to the “Bush Tax Cuts” will apply.  With a “portable” exemption amount of $5,000,000 per person, a married couple with $10,000,000 or less in total assets will have to do very little to avoid paying estate, gift or GST tax if both die in the next two years.  Beginning in 2013, the exemption will be reduced to $1,000,000 and will no longer be portable.  In addition, the maximum estate, gift and GST tax rate will return to 55%, absent some action by Congress. 

The keys to planning in uncertain times are flexibility and vigilance.  Your estate plan should consider and provide for the current tax rates and exemptions as well as those future rates and exemptions that can be reasonably anticipated at the present time.  Additionally, you and your advisors will need to monitor both your financial situation and the changes in the law to determine if any adjustment to your estate plan is appropriate.

There are a number of techniques for reducing or eliminating estate, gift and GST taxes depending on the size of your estate.  Their suitability to your particular needs depends on a host of factors that we will be happy to discuss with you.

Life insurance is also a valuable tool that can be use to used to provide for the payment of estate taxes upon your death.  Life insurance policies owned by either you or your spouse may be transferred and held in an Irrevocable Life Insurance Trust (“ILIT”) with the proceeds going directly to your beneficiaries at your death. If you transfer a life insurance policy to an ILIT by gift and you survive for three years after such gift, the insurance proceeds will not be included in your estate for estate tax purposes.

What is a typical estate plan for a family with minor children?   

For a family with minor children, a typical estate plan may include the drafting of reciprocal Wills for both parents which provide for the appointment of a guardian for your children, the creation of a trust for the benefit of the children if something were to happen to both parents, and the execution of durable and health care powers of attorney for both spouses.  Additionally, beneficiary designation on your qualified and non-qualfied retirement accounts should be reviewed and options discussed including the establishment of IRA’s and trusts.

If the family wants to limit the cost, expense and time involved with probate while maintaining control over their property, a revocable trust is a good option.   Tax planning should also be considered to limit potential gift and estate taxes in light of both the current law and anticipated changes.

For assistance with formulating and implementing an estate plan, contact our firm for an appointment or Email David or Stephen.