ADVANCED ESTATE TAX PLANNING

The federal estate tax is $12,092,000 million for 2023, thanks to that inflation indexing (and a nearly “automatic”* $25,084,000 for married couples who follow very specific requirements at the death of the first spouse). 

The federal transfer tax system has a unified exemption that ties together the gift tax and the estate tax. This means that, to the extent you utilize your lifetime gift tax exemption while living, your federal estate tax exemption at death will be reduced accordingly. The unified lifetime gift and estate tax exemption in 2022 is $12,060,000. The top tax rate is 40%. Note: Gifts made within your annual gift exclusion amount do not count against your unified lifetime gift and estate tax exemption.

The annual gift exclusion is $16,000 for 2022, up from $15,000, where it remained for many years. Married couples can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $32,000 to as many individuals as they choose each year, whether both spouses contribute equally, or if the entire gift comes from one spouse. In the latter instance, the couple must file an IRS Form 709 Gift Tax return and elect “gift-splitting” for the tax year in which such gift was made.

The amount that can escape federal estate taxation between generations, otherwise known as the Generation-Skipping Transfer Tax Exemption (GSTT) is unified with the federal estate tax exemption and the lifetime gift tax exemption at $12,060,000. As with estate and gift taxes, the top tax rate is 40%.

So, what is this GSTT? Basically, it is a transfer tax on property passing from one generation to another generation that is two or more generational levels below the transferring generation. For instance, a transfer from a grandparent to a grandchild or from an individual to another unrelated individual who is more than 37.5 years younger than the transferor.

Properly done, this can transfer significant wealth between generations.

The ATRA 2012 made “permanent” a new concept in estate planning for married couples, ostensibly rendering traditional estate tax planning unnecessary. This concept, called “portability,” means that a surviving spouse can essentially inherit the estate tax exemption of the deceased spouse without use of “A-B Trust” planning. As with most tax laws, however, the devil is in the details. For example, unless the surviving spouse files a timely (within nine months of death) Form 706 Estate Tax Return and complies with other requirements, the portability may be unavailable.

In addition, married couples will not be able to use the GSTT exemptions of both spouses if they elect to use “portability” as the means to secure their respective estate tax exemptions. Furthermore, reliance on “portability” in the context of blended families may result in unintentional disinheritances and other unpleasant consequences.

If you are concerned about how your current estate and gift planning may function in light of the current tax laws, then we encourage you to 

Florida no longer has an estate tax – a tax paid by the estate, nor an inheritance tax – a tax paid by a recipient of a gift from an estate.

Florida’s estate tax system is commonly referred to as a “pick up” tax. This is because Florida would pick up all or a portion of the credit for state death taxes allowed on the federal estate tax return (federal Form 706 or 706NA). Since there is no longer a federal credit for state estate taxes on the federal estate tax return, there is no longer a basis for the Florida estate tax.