Quick Overview of 2014 Federal Estate and Gift Tax Amounts

The federal estate tax exemption amount is $5,000,000 and is adjusted annually for inflation. This year the exemption amount increases to $5.34 million. This means that a married couple can protect up to $10.68 million. The estate tax rate is 40%.

The annual exclusion from gift taxes will remain at $14,000 for 2014.

Avoiding the Fiscal Cliff – Estate Taxes

With the Senate tax bill passing the House, it is expected that it will be signed into law. It does not appear that there was a lot of focus on the estate tax. Considering that most tax revenue is generated by the income tax, it is not surprising. Estate planners will at least have some certainty going forward regarding the estate and gift taxes. I was pleasantly surprised to see that the exemption amount will remain at five million dollars ($5,000,000) per person. This means that a married couple with proper planning can pass up to ten million dollars ($10,000,000) estate tax-free. Furthermore, the exemption amount is indexed for inflation. The exemption amount as adjusted for inflation was $5,120,000 in 2012 and should be just slightly higher in 2013. If Congress did not address the estate tax exemption amount it would have returned back to one million dollars ($1,000,000).

 
The other important component of the estate tax is the maximum tax rate. The highest tax rate for 2013 will be 40%. While this is an increase from 35% for 2012, it would have been raised back up to 55% had Congress not acted.

Columbus Bar Association 2012 Annual Meeting

This Friday, June 15, at noon is the Annual Meeting of the Columbus Bar Association (CBA). Current CBA President, David Bloomfield will preside and be sworn in as Immediate-Past President. Brad Wrightsel will be sworn in as President, and Mark Petrucci will be sworn in as President-Elect. Keith Schneider will be sworn in as Secretary-Treasurer.

Board members who were re-elected for a second term are Jennifer Adair, Aaron Granger, and Jay Michael. The newly elected board members are  Jim Abrams, Stephanie Hanna and LeeAnn Massucci. These board members will join the following board members: Jack Guttenberg, Brigid Heid, Sandra McIntosh, Lisa Pierce Reisz, and Gregory Travalio.

The Executive Director of the CBA is Jill Snitcher-McQuain.

Charitable Lead Trusts Revisited

Who is an ideal candidate for a Charitable Lead Trust (CLT)? First and foremost, the person must be charitably-inclined. Another obvious factor is that the person has wealth. I mean wealthy from the standpoint that the person does not need the income from the property to be placed in the trust. What is an ideal asset for a CLT? An asset that will significantly appreciate in value. An asset that is liquid and/or produces enough income to cover the charitable annuity.

Use It or (Possibly) Lose It

Currently, the federal gift tax exclusion amount is $5,000,000. If Congress does nothing, which we know from recent years is a real possibility, the law sunsets on December 31, 2012 and the exclusion amount will drop to $1,000,000. If Congress does act, it is possible (maybe even likely) that the exclusion amount will be lower than $5,000,000. This means that the wealthy may have less than two years to gift significant wealth tax-free.

Automatic Extension of Time Shortened

The automatic extension of time to file a Form 1041 Fiduciary Income Tax Return was recently shortened from six months to five months by the IRS. The amendment to Treasury Reg. Section 1.6081-6T is effective as of June 24, 2011. Of course, the automatic extension to file the return does not extend the payment deadline.

Ohio to Bid Adieu to Estate Tax

Ohio Governor John Kasich signed House Bill 153 (Ohio Budget Bill) yesterday, which, among other things, repeals the Ohio Estate Tax for decedents dying on or after January 1, 2013. On one hand, the repeal of the tax will be a major loss of revenue for local governments. On the other hand, it makes Ohio a more attractive state tax-wise. For many years, Ohio residents with homes in other states, like Florida, have changed their residences for more tax-friendly treatment. Currently, the applicable exclusion amount in Ohio is $338,333, meaning that a decedent's estate would have to file an estate tax return if the decedent died with over that amount. Last I checked, that was the smallest exemption amount of all the states in the United States.

Blogging for Lawyers

On April 19, 2011, from noon to 1:00 P.M., the CBA will be presenting a basic course on Blogging for Lawyers. This discussion will cover the pros and cons of undertaking the creation of a blog. More information can be found here at the CBA website.

Don't Sell the Farm!

Over Thanksgiving Break, I was talking with a family of farm descendants. Their father died and his estate consists mostly of farm acreage. The appraised value of the land was considerably high and would subject the estate to a large amount of estate tax liability. Of course, there is little liquidity to pay any estate tax.

They need to consider whether the real property qualifies to use a special use valuation. The advantage is that the real property is valued at its farm use value rather than its fair market value. If the farm is located in Ohio and passes from the decedent to a qualified heir, such as a surviving spouse or children, it may qualify. The farm property must be devoted exclusively to an agricultural use. Also, the adjusted fair market value of the farm real estate must be at least 25% of the value of the decedent's adjusted gross estate.

Recommended Website: USA.gov

Another website that you might want to be aware of is USA.gov, which is the United States Government's official web portal. There is a section on vital documents and what to do if they are lost or destroyed. This covers everything from your passport to damaged U.S. currency. Other topics are benefits (with a benefit calculator included), government jobs and government auctions.

The Qualified Domestic Trust

As stated in our previous post, the unlimited marital deduction is disallowed for distributions to non-citizen spouses. There is an exception to this disallowance however. A Qualified Domestic Trust (QDOT) can be created whereby property can pass to the non-citizen surviving spouse and qualify for the marital deduction. The QDOT can be created post-death provided that the property is transferred to the trust or is irrevocably assigned prior to the estate tax return due date.

The Unlimited Marital Deduction

There is no estate tax liability for assets passing from a deceased spouse to the surviving spouse. Both Ohio and federal provide for an unlimited marital deduction for the transfer of property between spouses. This is based upon the view that the husband and wife are one economic unit.

The marital deduction applies to transfers during lifetime and at death. The deduction is only for U.S. citizens regarding property passing from one spouse to the other (the citizenship requirement is to ensure that the government can ultimately collect the estate tax from the surviving spouse's estate). This is one reason that estate planning attorneys want to confirm that husband and wife are both U.S. citizens (especially with Ohio's close proximity to Canada).

Technically, the marital deduction simply defers the estate tax and does not avoid it. While an outright bequest of decedent’s entire estate to a spouse will eliminate estate tax at the decedent’s death, the surviving spouse’s estate will be taxed on all of the assets transferred from decedent (that is unless the surviving spouse consumes or gifts away the assets). As a consequence, the marital deduction simply defers the tax to the second estate.

What Happens to the Exemption for Generation-Skipping Transfer Tax in 2011?

We are already Mid-November and nothing has happened legislatively regarding the federal estate tax exemption. Although the Generation-Skipping Transfer (GST) Tax is independent of the federal estate tax, legislative changes to the exemption amounts would likely occur at the same time. Since 2004, the GST exemption equaled the estate tax applicable exclusion amount. In 2009, the GST exemption was $3,500,000. In 2010, the GST was repealed, and in 2011 the tax will be back with an exemption amount of $1,060,000,indexed for inflation.

The GST tax is imposed on asset transfers to "skip persons". "Skip persons" are generally grandchildren and later descendants of the donor, if the donor's child, who is the parent of the donee is living.

The government's concern of generation-skipping transfers is best shown by example.

Rich Guy-àGuy's son-àGuy's grandson-àGuy's great grandson

V V V

First Estate Second Estate Third Estate

In the normal case, you would have 3 separate estates from which the government could tax. However, where Rich Guy's estate is placed in trust with son and grandson having right to income with principal going to great grandson, Rich Guy gets similar result and 2 generations of estate tax skipped.

Will the federal government act in the short term to change the GST exemption amount or will it go back to its 2001 level?