Florida Probate Litigation Lawyer Blog
The estate tax, commonly referred to as the “death tax,” affects only certain estates with a taxable value beyond a set figure. For 2023, any estate exceeding a taxable value of $12.92 million is taxed at a rate of 40.00%. While this does not give cause for concern to the vast majority of individuals, these figures can and do change. The estate tax is often a topic of discussion in political debate and frequently changes. As recently as 2017, the amount to trigger estate tax was just under $5.5 millon. In 2008, the amount was $2 million. Future years could see a reduction in the presently-set amount, which could encompass individuals currently exempt from estate tax liability.
This variability poses concern from an estate planning perspective. While a relatively modest estate may be exempt from estate tax one year, it may very well be subject to the tax in another year. Thus, the higher the value of an estate, the more at-risk it is over time of owing an estate tax. To account for this, estate planners have utilized numerous strategies to reduce an estate before death and minimize potential estate tax liability. One such strategy is gifting property away on an annual basis during the testator’s life.
Individuals may gift a set amount of money each year without triggering any tax consequences. The federal government sets an annual exclusion that allows for a certain amount to be gifted tax-free each year to individual recipients. For 2023, the annual exclusion is $17,000 per recipient. In other words, if a mother gives $17,000 to each of her seven children in 2023, then $119,000 is removed from her ultimate estate tax-free. If such gifts are made on an annual basis (subject to each year’s gift tax exclusion amount, which may vary from year-to-year as the estate tax might), the mother can reduce her taxable estate substantially during her life, saving potentially millions of dollars in estate tax upon her death.
If a donor gifts an amount exceeding this annual exclusion to an individual, the excess will trigger a gift tax, which operates similarly to the estate tax. These two tax regimes are unified; gifts exceeding the annual exclusion will eat into the estate tax exclusion amount. In other words, if a father gifts $1,017,000 to one child in 2023 and then dies the same year, assuming no other lifetime taxable gifts, then the father’s estate will trigger estate tax if it has a taxable value of $11.92 million or more, with the extra $1 million have already been used by the lifetime gift. It is thus helpful to think of this lifetime exclusion amount as a unified credit: any amount not gifted during life can be passed on to heirs after death, and gifts within the annual gift exclusion do not count against the unified credit.
For estate planning purposes, property within the annual gift exclusion may be gifted away to reduce the value of an individual’s taxable estate. The annual gift exclusion can change each year, subject to the whims of Congress, so it is important to be mindful of the amount each year. But what kind of property should be gifted, and what kind should be left in the estate to pass to heirs upon death? In short, unappreciated property generally should be gifted during life, and highly appreciated property generally should be bequeathed upon death. However, these guidelines are generalized, and what you should do with your particular assets must be discussed with an estate planning attorney or tax professional. A further explanation requires a discussion of “cost basis.”
“Cost basis,” or “basis,” refers to the amount paid to acquire property. Basis is the starting benchmark for how gain or loss is measured upon the disposition of property. For example, if a painting is purchased for $5,000, and it is then sold for $15,000, then there will be $10,000 of gain on the sale of the paining. If a car is purchased for $30,000 and sold for $20,000, then there is a $10,000 loss on the sale of the car. Because of this arrangement, taxpayers want a high basis in property to avoid large gains, which may trigger an income tax.
When property is gifted during life, the recipient takes the donor’s basis in property. This concept is called a “transferred basis.” For example, if a mother purchases an antique vase for $1,000, and then gifts it to her son after ten years when the vase is worth $5,000, then the son’s basis in the vase is still $1,000. If the son promptly sells the vase, he will have a taxable gain of $4,000. However, property bequeathed after death takes a “stepped up” basis to its fair market value immediately before death. Continuing the same example, if the mother left the vase to the son in her will, and the vase was worth $5,000 when the mother died, then the son’s basis in the vase will “step up” to $5,000, giving the son no taxable gain if he sells it for that same amount.
This structure gives an incentive to bequeath highly appreciated property after death, such as in a will or a trust, so that the beneficiary takes a stepped-up basis and avoids large taxable gains upon their disposition of that property. Similarly, there is an incentive to gift non-appreciated assets during life, such as cash, certain collectibles, or certain securities. Consistently making lifetime gifts within the annual gift exclusion amount is a helpful way to reduce estate tax liability and pass on wealth to loved ones.
The attorneys at Chepenik Trushin LLP are ready, willing, and able to assist with all your estate planning needs. Please contact us today at 305-981-8889 to discuss your estate planning needs.
