Answers to Some Basic Client Tax Questions

Answers to Some Basic Client Tax Questions

The Reconciliation (“Tax Cuts and Jobs”) Act of 2017 (“Act”), signed into law on December 22, 2017, raised the estate tax exemption to $11.7 millionper person ($23.4 million for couple) who dies in 2021.  (This increased exemption is scheduled to repeal in 2026 and revert to the exemption – $5 million indexed for inflation – available under the prior American Taxpayer Relief Act of 2012.)  The Act increases the top estate, gift and GST tax rate to 37% for deaths after 2017.  The Act also continues to make any unused portion of the estate tax exemption in the estate of the first spouse to die “portable” – that is, the surviving spouse can elect to add that unused exemption to his/her $11.7 million exemption at the second death.  Therefore, a net estate of less than $11.7 million for an individual, or $23.4 million for a couple, can pass free of estate taxes. 

The “net taxable estate” is the gross estate value, less mortgage debts, probate costs, charitable bequests and the value of all property left to a surviving spouse.  A person’s “gross estate” will consist of the value of all real and personal property, investments and money accounts owned solely by that person, plus the value of that person’s proportionate share of property owned jointly with another, plus the face value of all life insurance policies insuring that person’s life if he/she owns the policy (that is, has the right to cancel or change the beneficiary), even though the death proceeds may be payable to another as the designated beneficiary.

Clients often tell me that they have made some gifts to children or grandchildren, but have limited those gifts to $15,000 to each recipient “because the law doesn’t allow me to give more than that, right?”  I tell them “No, that is not right.  You can give any amount you want to them and no one should have to pay any tax on that.”  This is because a gift is not taxable “income” to the recipient.  Also, there IS the gift tax rule that gifts of no more than $15,000 to each recipient will not have to be reported and will not be taxable.  The “gift tax” is never paid by the recipient but only by the giver.  However, there is a lifetime exemption from gift taxes equal to the estate tax exemption – $11.7 million as noted above.  Therefore, if a client’s estate is less than $11.7 million, s/he can give any amount to another person without incurring any gift tax on the transaction.

Knowledge of these basic facts has allowed many of our clients to proceed with gifts and other family financial transactions without worry.  Let us help you understand your legal options and their effects.  Call today for an appointment.