Various Taxes Affect Estate
It is said that one cannot avoid death and taxes. As Estate & Inheritance Tax Planning Attorneys in Portland, we know our clients certainly face more taxes than they expect: gift, estate and inheritance, generation-skipping, capital gains and the deferred taxes in pension assets such as IRAs.
In fact, these taxes can be eliminated, greatly reduced or postponed. But this does not happen without thoughtful planning. A brief description on these taxes is included below.
Gift taxation is the process of taxing certain gifts made during an individual’s lifetime. Note that it is the person making the gift who has the reporting and tax consequences, not the person receiving it.
The Internal Revenue Code distinguishes between reportable and non-reportable gifts. A non-reportable gift is a gift of $14,000 or less (as of 2015) made by one individual to any other individual in any one year. A married couple may give up to $28,000 to any one individual in any one year, without requiring the filing of a gift tax return. A reportable gift is a gift greater than $14,000 by an individual, or greater than $28,000 by a couple.
When you file a gift tax return, the amount gifted over $14,000 reduces dollar for dollar the tax-free estate “credit” used for federal estate taxes. You do not have to actually pay the government any gift tax until you have used up your credit, or until you give away over $5.43 million during your lifetime.
There are two special situations to remember in making gifts during your lifetime. An outright gift from one spouse to the other spouse is never reportable or taxable and the amount of the gift can be unlimited. A gift to a tax-exempt charitable organization does not reduce your tax-free credit.
Using reportable and non-reportable gifts to reduce estate taxes and accomplish a client’s beneficial intent is one of Nay & Friedenberg’s planning tools.
Estate and Inheritance Taxes
Estate and inheritance taxes depend on the size of your estate at the date of your death. Tax planning is an important part of estate planning if the size of your estate is over $1 million.
For decedents who pass in 2015, the federal government taxes estates valued at $5.43 million or more. Oregon residents also have to worry about state inheritance taxes imposed on estates of $1 million or more.
In any event, a married couple can establish a tax-planning trust to ensure that no estate taxes are paid until the death of the second spouse and to ensure that the couple maximizes the amount protected from estate taxes. With the proper planning, married couples can often transfer, free of estate taxes, twice as much as a single person. Nay & Friedenberg LLC can advise how establishing a tax-savings trust can save your heirs hundreds of thousands of dollars.
If a couple’s estate exceeds the combined total of each spouse’s state and/or federal credit, additional strategies may be employed to reduce or eliminate estate taxation at the death of the surviving spouse.
One such strategy is to establish a charitable trust. You can set up a charitable trust so that you receive all income earned by the principal during your lifetime. Upon your death, the principal is distributed to the charitable entity, free of estate tax.
An irrevocable life insurance trust may also be employed to reduce the size of an individual’s estate, thereby reducing estate taxes by removing the life insurance policy out of the owner’s possession and giving ownership to the trust. An irrevocable life insurance trust may also serve as a means of creating funds to cover some or all of the estate tax burden at the death of the individual.
A tax known as generation-skipping tax is seen in cases in which a trust or will passes an estate to beneficiaries more than one generation removed from the decedent— to one’s grandchildren or great-grandchildren, for example— bypassing the generation of one’s children. In 2015, generation-skipping tax only applied to amounts in excess of $5,430,000. Planning to avoid or reduce this tax requires the very highest level of sophistication.
Capital Gains Tax
Congress recently restored favorable capital gains tax treatment for estates of decedents who pass in 2011. “Capital gains tax” is the tax imposed on the profit earned upon the sale of investment assets that have appreciated since their initial purchase. When an heir receives such an investment asset as an inheritance, the heir gets a tax bonus. The initial purchase price paid by the decedent is forgotten. The heir, therefore, will pay tax on the difference between the sales price and the fair market value of the asset as of the date of the decedent’s death. If you have such highly appreciated investment assets in your portfolio, you should consult with an attorney about the capital gains tax consequences of leaving those assets to your heirs.