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Recent Changes to the Estate and Gift Tax Law: Does it Apply to Me?

Recent Changes to the Estate and Gift Tax Law: Does it Apply to Me? by Tom Sciacca{Read in 6 minutes}  Whether we are incredibly wealthy or not, most people have to deal with filing a tax return on at least an annual basis — and many people find the process intimidating. The tax with which we are most familiar (particularly around this time of year) is the income tax. However, as a Trusts & Estates practitioner, I spend a fair amount of time discussing both the estate tax and the gift tax with my clients. Recently, I published a primer on the estate tax, which you can read here in a little more detail. Congress has made some changes in the tax law that I would now like to address.

Just for purposes of catching everyone up to speed, however, the estate tax is a death tax; all assets that one owns upon his or her death are subject to estate tax. To the extent that the assets exceed the exclusion amounts, the deceased’s Estate is responsible for paying the estate taxes. If the deceased’s Estate does not exceed the exclusion amounts, then no taxes are due.

The gift tax is a tax that is imposed upon lifetime transfers. When you think about it, smart people might completely avoid paying the estate tax by giving everything away on their deathbed. The gift tax is coupled with the estate tax in an effort to prevent people from doing this.

Estate Tax

For most people, the question that they should be asking is: Do my assets exceed that exclusion amount? For purposes of the Federal estate and gift tax, we have a unified exclusion amount, which is presently over $11 million per individual (a married couple would have double that amount). We have seen a lot of fluctuation in the Federal exemption amount over the years. Going back to when I started practicing law over 15 years ago, the exclusion amount was just over a million dollars. Subsequently it has increased to two, then three and a half, then $5 million dollars. And in January 2018, it increased to this $11 million plus number.

For those people who live in a state where they have a state level estate tax (such as New York State), the exclusion amount may differ from the Federal exclusion amount. For example, under present law, the New York State exemption still remains at just over $5 million. It did not increase with the Federal amount earlier this year, so it is possible that New Yorkers who fall between the New York and Federal exclusion amounts will have to pay New York estate taxes, but not federal estate taxes.

What you should take away from this discussion, however, is that most people don’t owe any estate taxes at all. Most people, when you look at their individual assets, have less than $5 million (or $11 million). This is both a good and bad problem to have. While it would be fantastic to be a multi-millionaire, the reality is that most people are not, and should not be terribly concerned with paying estate taxes upon their death. Those who do have Estates which exceed their exclusion amounts, would be well served to speak to an attorney who can counsel them on estate tax planning.

Gift Tax

Finally, the gift tax is important. Most people don’t think about giving away all of their assets during their lives, because frankly, we need to pay our bills and spend a little bit of our own money every now and then. For those who do wish to make gifts, however, there is a limit on the amount of money that they can give tax free to a beneficiary.

The old number that people may have heard for years, and years, and years was $10,000. Having increased steadily over the last several years, the new number, effective January 2018, is $15,000. How does this work? If I am going to make a gift to a beneficiary, I can give up to $15,000 per beneficiary, per calendar year without it counting as a “taxable gift.” A taxable gift means that I have made a gift in excess of this $15,000.00 amount (or not otherwise exempt, such as a charitable donation, a gift to a spouse, or paying for someones qualified medical or education expenses by making payment directly to the service provider) — which requires that I file a gift tax return. What is the consequence of making a taxable gift? Simply that I would have to file a gift tax return and advise the IRS that I am using part of my credit contained within the exclusion amount.

If I make more taxable gifts during my lifetime than the exclusion amount, I may have to write a check to the treasury. Unlike the estate tax, most states, (including New York State) do not have a gift tax.

So in summary, while the estate and gift tax may be things that we often hear about, these are things that most people need not concern themselves with simply because they do not have the type of wealth that would subject them to taxation.

For more information on this topic, please contact me.