You are here: Home Planning Ahead Estate Planning Gift, Estate, and ... Summary
Information about all aspects of finances affected by a serious health condition. Includes income sources such as work, investments, and private and government disability programs, and expenses such as medical bills, and how to deal with financial problems.
Information about all aspects of health care from choosing a doctor and treatment, staying safe in a hospital, to end of life care. Includes how to obtain, choose and maximize health insurance policies.
Answers to your practical questions such as how to travel safely despite your health condition, how to avoid getting infected by a pet, and what to say or not say to an insurance company.

Summary

As if taxes on what we earn by working or selling property isn't enough, we also have to be concerned with taxes that can be levied on gifts we make while we're alive, and the transfer of our property at death.

Gift taxes and estate taxes are discussed together in this article because the tax law combines them.

We also discuss Generation-Skipping Transfer Taxes here because they are closely related to estate taxes.

If you can minimize taxes, you'll be able to pass on as much of your assets as possible to the people and/or causes you care about. Minimizing estate taxes beyond the use of non-taxable gifts is beyond our scope.

If your current estate with or without your spouse's assets, plus all the taxable gifts you've made since 1976 is near or over $11,580,000, consider consulting with a tax attorney, certified financial planner or other estate planning professional to determine if you are subject to estate tax, and if so, how to minimize the tax. If your condition might be terminal, be sure to be upfront about your situation so that the expert can plan appropriately.

To Learn More

More Information

Accountants Financial Planner Attorney

Related Articles

Estate Planning Tax

What Is The Unified Credit For Gift And Estate Taxes?

A tax credit is an amount that eliminates or reduces tax.

The unified credit is a credit against taxes that would otherwise be due that is applied to both gift and estate taxes -- the two taxes are said to be "unified." The total amount of credits (if any) that you use for gift taxes over the course of your lifetime reduces the credit available to pay any estate taxes that might be due.

To find the current amount, see IRS publication 950.  Go to www.IRS.gov offsite link. Type "Publication 950" into the search box.

 


What Is The Gift Tax?

Gift taxes:

  • Are taxes that apply to money or property you give away while you are alive.
  • Gift taxes can be as high as 45% of the amount of the gift.
  • Gift taxes are the responsibility of the person making the gift. The person who receives the gift does not pay any tax.
  • There are gift taxes on both a federal and state level. This discussion only concerns the federal situation. Check your state's law as well.

Assets that are transferred after you die might be subject to estate tax.

When Must I File A Gift Tax Return?

Generally, you must file a gift tax return if:

  • You give more than $15,000 during 2020 to someone other than your spouse.
  • You and your spouse "split" a gift and have no tax for gifts up to $30,000 per year per recipient.
  • You gave someone (other than your spouse) a "gift of a future interest" of any amount -- a gift that he or she cannot actually possess, enjoy, or receive income from until sometime in the future. For example, you give your 15 year old neice $50,000 which she cannot access until she is age 21.
  • You gave your spouse a "terminable interest" of any amount in a property - an interest in property that will be ended by some future event, such as your death. For example, you let an ex-spouse remain in the house as long as you are alive.

If you need to file a gift tax return, obtain a copy of IRS Form 709, available at www.irs.gov/pub/irs-pdf/f709.pdf offsite link. Instructions for completing the form are at www.irs.gov/pub/irs-pdf/i709.pdf offsite link.

Which Gifts Are Taxable? (The Annual Gift Tax Exclusion and more)

The general rule is that gifts are taxable, except:

Annual Exclusion:

  • The gifts that most people make, whether a $20 Furby or a $5,000 Rolex watch, are not taxable because of the "annual exclusion." As of 2020, gifts adding up to $15,000 each calendar year, per recipient, are excluded from the gift tax.
  • If you are married, you and your spouse can give each recipient up to $30,000 during the year with no gift tax concerns. The increase only applies to married couples. It does not apply to significant others, no matter how long the relationship. So long as you and your spouse agree to give the gift together, it doesn't matter what portion of the gift each of you pay. One spouse can pay the entire amount -- as long as both spouses agree that the gift will be treated as if it were "split" (in other words, that each gave one half of the total amount). For example: John gave each of his three children $16,000 last year. $1,000 ($16,000 minus $15,000 annual exclusion) of the gift to each child is a taxable gift. If John were married, and he and his spouse elected to use gift-splitting and make the gifts together, no tax would be due because each child receives less than $30,000 per year. 

 The Annual Exclusion helps reduce the amount of an estate subject to estate tax.

Other Exclusions from Gift Taxes: Regardless of their size, the following gifts are also generally not taxable (and are also used to reduce the amount of assets subject to estate tax):

  • Medical expenses that you pay for someone directly to a health care provider -- whether or not the person who incurred the expenses is related to you. Note that the expenses have to be paid directly to the provider. It doesn't count if you reimburse the patient, or give the patient the money to pay the bill instead of paying the provider directly.
  • Tuition expenses you pay for someone directly to an educational institution.
  • Gifts to your spouse.
  • Gifts to a political organization.
  • Gifts to charities.

If I Make Taxable Gifts, Will I Have To Pay Tax?

Depending on the size of the gift, you often will not have to pay gift taxes, even if you've made a taxable gift. This is because of the Unified Credit, a credit available to reduce or wipe out any gift taxes that you owe.

After you have determined which of your gifts are taxable, compute the amount of gift tax due on your taxable gifts and apply the unified credit for that year (reduced by the amount of unified credit used in previous years) to the tax. Unless the tax is more than the available credit, no tax is due.

Example: In 20190, Gloria gave her niece, Mary, a cash gift of $8,000, paid $17,000 college tuition to the University for her friend David, and gave her son, Keith, $38,000. In 2019, the annual gift tax exemption was $15,000.

  • The gift to Mary will not be a taxable gift because the total amount of gifts to Mary that year is less than $15,000.
  • The tuition paid for David is also not a taxable gift because of the educational exclusion.
  • $23,000 of the gift to Keith ($38,000 less the $15,000 annual exclusion) is taxable. 
  • Therefore, Gloria's total taxable gifts for 2019 are $23,000. Since Gloria has never given a taxable gift before, no gift tax is due because she has the full amount of the unified credit is available to be applied.
  • While Gloria does not have to pay any gift taxes this year, the amount of her unified credit that is available in future years will be reduced by the amount of tax that would have been payable on the $23,000 portion of the gift to Keith.

Can I Take An Income-Tax Deduction For Gifts I Make?

Unless the gift you make is to a charitable organization or for the medical expenses paid directly to a health-care provider on behalf of a qualifying individual, gifts are not tax-deductible.

To Learn More

What Is The Estate Tax?

Estate tax is a tax that may be applied to your taxable estate at your death. Your taxable estate is your gross estate less allowable deductions.

The amount of the federal estate tax exemption and the maximum estate tax rate for 2020 are: 

  • Estate Tax Exemption Amount                   $11,590,000
  • Maximum Estate Tax Rate                         40%

 

Does The Person I Give A Gift To Have To Pay Taxes?

No. The person receiving the gift is not responsible for any taxes.

What Is The Generation-Skipping Transfer Tax (GSTT)?

The generation-skipping transfer tax is a federal tax that may be imposed on gifts you make to people who are two generations below you, such as to grandchildren. However, as with gift taxes, there is an annual exclusion per gift recipient per year and there are exclusions for medical and educational expenses you pay. 

Any GSTT you pay is also considered a gift, and may therefore be subject to gift tax as well! Plus, if you die within three years of paying the GSTT tax, the gift tax that you paid on account of the GSTT tax will be included in your estate and then possibly subject to estate taxes as well! 

There may also be state estate and gift taxes due.

For information, see: http://www.irs.gov/uac/Form-706,-United-States-Estate-(and-Generation-Skipping-Transfer)-Tax-Return offsite link

What Is In My Gross Estate?

Your gross estate includes the value of all property in which you have an interest at the time of death (such as stocks and other securities, real estate, business interests, jewelry and other personal property, trusts and cash), plus the following:

  • Life insurance policies payable to your estate, regardless of who owns the policy.
  • Life insurance policies that you own, regardless of who receives the benefit.
  • The value of annuities paid to your estate or your heirs. This includes, for example, annuities from a pension plan. This does not include an annuity that terminates upon your death.
  • The value of certain property you transferred within three years before your death. While most property you transfer within three years of your death will not be swept back into your estate (and therefore taxed), some will be, including life insurance policies and all gift taxes that you paid. 

The assets are valued at fair market value - not the amount you paid for them or the value on the date they were acquired.

To learn more, see: IRS Publication 950: Introduction to Estate and Gift Taxes www.irs.gov/publications/p950/index.html offsite linkand Form 706: United States Estate (And Generation-Skipping Transfer) Tax Return, available at: www.irs.gov/pub/irs-pdf/f706.pdf offsite link. The instructions for Form 706 are available at: www.irs.gov/pub/irs-pdf/i706.pdf offsite link

What Is My Taxable Estate?

In general:

  • Your taxable estate is your gross estate (see immediately above) minus allowable deductions.
  • Allowable deductions include:
    • Funeral expenses paid out of your estate.
    • Administrative expenses of the estate, including commissions, attorney and accountant fees, court costs, and the expense of selling assets.
    • Debts owed at the time of death, including unpaid mortgages and taxes.
    • The marital deduction (generally the value of the property that passes from your estate to your surviving spouse in an unlimited amount. NOTE: If your spouse is not a U.S. citizen, this deduction is limited).
    • Charitable contributions with no limit.

To learn more, see: IRS Publication 950: Introduction to Estate and Gift Taxes www.irs.gov/publications/p950/index.html offsite linkand Form 706: United States Estate (And Generation-Skipping Transfer) Tax Return, available at: www.irs.gov/pub/irs-pdf/f706.pdf offsite link. The instructions for Form 706 are available at: www.irs.gov/pub/irs-pdf/i706.pdf offsite link

Will My Estate Have To File An Estate Tax Return?

If your gross estate plus taxable gifts you made after 1976 is more than the filing requirement for the year of death, your estate will have to file a return.

The filing requirement is the same as the exclusion amount applicable to the unified credit (above) in the year of your death.

Will My Heirs Have To Pay Tax On Their Inheritance?

Generally, no.However, you should check with an accountant to find out about the law in your state.

Your estate is generally required to pay any taxes before distributing assets.

If you prefer, you can specify that a gift made in your Will be made tax-inclusive: the amount of estate taxes attributable to that gift reduces the amount of the gift. For example, if you have a taxable estate, you can give in your Will $100,000 to your aunt Sheila, either providing that she gets the entire $100,000 so the estate pays the tax, or she gets $100,000 less the tax attributable to that amount.