Estate and Gift Tax

The laws dealing with estate tax are separate and distinct from those relating to probate. These are two totally unrelated sets of laws. For example, property held in a living trust does not go through probate but is subject to estate tax. A POD bank account also avoids probate but is subject to estate tax.

The federal estate tax exemption amount is Five Million Dollars ($5,000,000 plus an inflation adjustment) beginning in 2012. This amount was doubled by the Tax Cuts and Jobs Act to $10,000,000 (plus inflation adjustment) beginning in 2018. Estates under this exemption amount will pay no federal estate tax. The federal gift tax lifetime exemption and generation skipping tax exemption amounts are also $10,000,000 (plus an inflation adjustment). These amounts as adjusted for inflation are:

2023: $12,920,000 2022: $12,060,000

The top estate tax rate bracket is 40%.

If the surviving spouse inherits the whole estate from his/her spouse, there is a “marital deduction” for the whole amount and therefore no estate tax due. Of course, when the surviving spouse passes away, then there is no marital deduction for property going to the children or other intended beneficiaries.

The federal estate tax is imposed on all property owned by the deceased on the date of death. To determine ownership one must look to the appropriate legal documents to determine how the property is titled. Property owned jointly with another may be included at full value or only half. If it was held as “tenants in common” with one other, then one-half of the value is taxable. If held as “joint tenants with right of survivorship,” then the general rule is that the full value is taxable. However, only one-half is taxable if the joint owners are husband and wife.

The Federal Estate tax law has a special provision allowing for portability of the estate tax exclusion amount between married couples. Thus, for a couple that has not done any estate tax planning with an AB trust or otherwise, the estate of the second spouse to die may be able to reduce the estate tax by using the unused exclusion amount of the pre-deceasing spouse. However, this well meaning provision has several pitfalls. The estate of the first spouse to die must file a federal estate tax return in order to elect use of the deceased spouse unused exclusion amount. This spouse’s estate may be less than the exclusion amount and, thus, is generally not required to file the federal estate tax return since there would be no estate tax due. Now this return would have to be filed just to make this election which would incur additional legal fees. Use of the traditional AB Trust would not require this filing. This trust would also offer the following advantages: protection of the trust amount from the surviving spouse depleting it unwisely or changing the beneficiaries agreed upon by both spouses; protection from creditor claims for the spouse or other beneficiaries; and avoiding estate tax on the appreciation of the assets in the trust. The special portability provision may offer some help for the person who did not do any planning but it is clearly not a better option than the AB trust.