Riverwoods Estate Tax Planning
We Will Help You Avoid or Minimize Your Transfer Taxes
Historically speaking, the federal estate tax is an excise tax levied on the transfer of a person’s assets after death. In actuality, it is neither a death tax nor an inheritance tax, but more accurately a transfer tax. There are three distinct aspects to federal wealth transfer taxes that comprise what is called the Unified Transfer Tax: Estate Taxes, Gift Taxes, and Generation-Skipping Transfer Taxes. Legal planning to avoid or minimize these transfer taxes is both a prudent and an important aspect of comprehensive estate planning.
The most recent iteration of the federal estate, gift, and generation-skipping transfer tax was signed into law by President Trump on December 22, 2017, as part of the Tax Cuts and Jobs Act of 2017 (TCJA 2017). There are a few things you ought to know about this law which took effect on January 1, 2018. Specifically, you should know the “numbers” governing transfers subject to estate, gift, and generation-skipping transfer taxation.
Federal Estate Tax Exemption
A $5 million exemption, as indexed for inflation, was signed into law on December 17, 2010, under the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (TRA 2010). By 2017, the federal estate tax exemption had risen to $5.49 million per individual due to the inflation feature (and a nearly “automatic”* $10.98 million for married couples who follow very specific requirements at the death of the first spouse).With the inflation factor the 2019 exemption is $11,400,000 per individual (and $22,800,000 for married couples). However, on January 1, 2026, the exemption reverts back to $5 million, adjusted for inflation. It is therefore estimated that it will be in the mid $6 million range at that time. The tax rate for amounts above what can be exempted remains at 40%.
*See “Portability” below for more on this.
Lifetime Gift Tax Exemption and Annual Gift Tax Exclusion
The TCJA 2017 continues the concept of a unified exemption that ties together the gift tax and the estate tax. This means that, to the extent you utilize your lifetime gift tax exemption while living, your federal estate tax exemption at death will be reduced accordingly. Your unified lifetime gift and estate tax exemption in 2017 was $5.49 million and for 2019 is now the same as the federal estate tax exemption of $11,400,000 per individual (and $22,800,000 for married couples). Likewise, the top tax rate is 40%. Note: Gifts made within your annual gift exclusion amount do not count against your unified lifetime gift and estate tax exemption.
So, how much is this annual gift exclusion?
The annual gift exclusion has increased to $15,000 due to its inflation adjustment. This is up from $14,000 for 2017. Married couples can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $30,000 to as many individuals as they choose each year, whether both spouses contribute equally, or if the entire gift comes from one spouse. In the latter instance, the couple must file an IRS Form 709 Gift Tax return and elect “gift-splitting” for the tax year in which such gift was made.
Generation-Skipping Transfer Tax Exemption
So, what is this GSTT? Basically, it is a transfer tax on property passing from one generation to another generation that is two or more generational levels below the transferring generation. For instance, a transfer from a grandparent to a grandchild or from an individual to another unrelated individual who is more than 37.5 years younger than the transferor.
Properly done, this can transfer significant wealth between generations.
The amount that can escape federal estate taxation between generations, otherwise known as the Generation-Skipping Transfer Tax Exemption (GSTT) is unified with the federal estate tax exemption and the lifetime gift tax exemption at $11,200,000 per individual (and $22,400,000 for married couples, subject to certain specific requirements and for 2019, $11,400,000 and $22,800,000 respectively). As with estate and gift taxes, the top GSTT tax rate is 40%.
The American Taxpayer Relief Act of 2012 (ATRA 2012), made “permanent” a new concept in estate planning for married couples, ostensibly rendering traditional estate tax planning unnecessary. This concept, called “portability,” means that a surviving spouse can essentially inherit the estate tax exemption of the deceased spouse without use of “A-B Trust” planning. As with most tax laws, however, the devil is in the details. For example, unless the surviving spouse files a timely (within nine months of death) Form 709 Estate Tax Return and complies with other requirements, the portability may be unavailable.
In addition, married couples will not be able to use the GSTT exemptions of both spouses if they elect to use “portability” as the means to secure their respective estate tax exemptions. Furthermore, reliance on “portability” in the context of blended families may result in unintentional disinheritances and other unpleasant consequences.
If you are concerned about how your current estate and gift planning may function in light of ATRA 2012, and thereafter, then we encourage you to schedule a consultation.
Illinois Estate Taxes
Illinois has its own separate estate tax. The exemption is $4,000,000 per person and is not indexed for inflation. Illinois also does not recognize portability so that a married couple needs to do careful planning so that each spouse can claim the $4 million exemption as otherwise this could cost potentially an additional $600,000 in taxes. Since the exemption is much lower than the federal limit, one can owe significant Illinois tax even if you owe no federal tax.
Illinois doesn’t just look at your Illinois property when calculating the tax. You have to include all of your property when making the tax calculation. To give an example, let’s say you have $4,000,000 in property considered to be located in Illinois and $1 million in real estate in another state. You would be considered to have an estate of $5 million. The tax would be calculated on that amount and you would pay 80% of that figure because 80% of your estate is considered subject to the Illinois tax.
The good news is that there is no separate Illinois gift tax, so there is opportunity to make gifts above the annual exclusion to significantly reduce the Illinois Estate Tax. However, you need to consider if these gifts may increase the income tax liability for your beneficiaries after your death.