miller nash llp | Spring 2011 brought to you by the trusts & estates practice team Estate Planning Advisor Wealth Transfer Tax System the trust assets would be included in Unless revised by Congress, in his or her taxable estate to compute the 2013, the federal estate tax exemption is federal estate tax. scheduled to go down to $1 million. The by Ronald A. Shellan tax rate is scheduled to go up to as high Some very important deductions ronald.shellan@millernash.com as 55 percent. (503) 205-2541 and exclusions are available in comput- ing the taxable estate. Liabilities such Federal Gift Tax. The federal gift Our federal wealth transfer tax as mortgages and expenses of admin- tax is designed to prevent decedents system can be quite complex. The istering the estate can be deducted. from avoiding the estate tax by simply rules have evolved over a long period State death taxes are also deductible. giving all their property away during of time. The federal wealth transfer In addition, transfers to a spouse can their lifetimes. The tax is computed on taxes consist of the estate tax, the gift be deducted. This deduction is called all taxable gifts. As is the case with the tax, and the generation-skipping tax. In the marital deduction. But transfers to estate tax, the marital and charitable addition, many states have their own an irrevocable trust for the benefi t of exemptions are available. Further, like inheritance or estate tax. What follows the spouse are not deductible, unless the estate tax, there is a $5 million life- is a summary about how each of the the spouse will receive all the income time exemption. Any gifts made during federal taxes operates. from the trust for life and an election lifetime, however, reduce the $5 million Federal Estate Tax. The federal es- is made, called a QTIP election, to exemption available on the death of a tate tax is a tax imposed on all the assets subject the trust assets to estate taxes (continued on page 8) owned by a deceased person. The assets at the surviving spouse’s death. Finally, are valued at their fair market value as assets passing to most charities can be inside this issue if they were to be sold. deducted from the taxable estate. 2 How to Maximize The assets that are subject to the Currently, estates under $5 million Nontaxable Gifts to Family estate tax are all assets owned by a de- are exempt from the federal estate tax. Members cedent. In addition, all assets in which The tax rate on the excess over $5 mil- 3 Revocable Living Trusts— someone had an interest are included lion is 35 percent. Thus, if the taxable What’s the Big Deal? in the estate. These rules can get com- estate was $6 million, the federal estate 4 Donor-Advised Funds: plicated, so I don’t want to explain them tax would be $350,000 (35 percent of Philanthropy Made Easy in detail. But a few examples might $6 million less $5 million exemption). 5 Transferring the Business help to illustrate what can be included to Children or Employees: If a married person dies and does in the estate. If someone created a trust A Recipe for Disaster? not use up the entire $5 million exemp- and retained the right to determine tion, the unused exemption amount who could benefi t from it, all the trust can be transferred to the surviving assets would be included in the estate. spouse and used at his or her death. And if someone was the benefi ciary of a That means that for a married couple, trust and the trust assets could be used a full $10 million in value can escape at that person’s death to pay creditors, estate taxes. www.millernash.com
How to Maximize Nontaxable Gifts to Family Members children and grandchildren (more with such provisions are referred to as if they make gifts to their children’s “Crummey trusts”—named after the spouses); (2) pay the tuition for all fi ve case that fi rst approved of this tech- by Adrienne P. Jeffrey grandchildren if they attend private nique. A gift to a minor may be made adrienne.jeffrey@millernash.com elementary or high schools; (3) pay to a custodial account set up under (206) 777-7512 the grandchildren’s college tuition; (4) state law with the child being entitled pay the medical expenses of all family to outright distribution of the account In 2010, the gift tax lifetime exemp- members; and (5) purchase health in- once the child reaches a certain age tion rose from $1 million to $5 million. surance for all family members. These (usually 21 or 25). One should carefully For many of us, that exemption means steps are simple and, when done con- consider whether it is wise to make an- that we will likely never have to pay sistently over time, can substantially nual gifts to a custodial account—if the gift tax. But there is no guarantee that reduce our imaginary couple’s taxable gifts are made annually, with growth, the exemption will remain that high, estates. These transfers are described the amount that the child is entitled and even if no gift tax is due, many below. to receive outright at the termination transfers require the fi ling of of the custodial account may be a gift tax return. This article s substantially more than is advis- describes transfers that can be “The gift tax generally applies to a able for a young adult to control. made without using your lifetime transfers in which the donor trans- exemption and without having to The second type of transfer fers value without receiving full value fi le gift tax returns. that does not consist of taxable t in return.” gifts (and is not part of the g The gift tax generally applies $13,000 annual exemption) is $ to transfers in which the donor the payment of educational and t transfers value without receiving The fi rst of the excluded transfers health care expenses. To qualify, these full value in return. Some transfers, is commonly referred to as the “an- payments must be made directly to although classifi ed as taxable gifts and nual exclusion gift.” Each individual the service providers. The educational requiring a gift tax return, do not result is allowed to give to another individual expense exemption is limited to tuition in gift tax being due—for example, gifts up to $13,000 a year completely and does not apply to payments for non- transfers that do not exceed the lifetime tax-free. Thus, a married couple can tuition items, such as books, supplies, exclusion amount (currently $5 million) give $26,000 annually. (This $13,000 and room and board. Medical expenses and most transfers to a spouse. fi gure is indexed for infl ation, so it may that can be paid without gift tax include Specifi c types of gifts are excluded increase for future years.) There is no medical care of the type that is deduct- from the defi nition of taxable gifts. limit on the number of individuals to ible for income tax purposes, transpor- These gifts, regardless of the recipient, whom these gifts can be made. tation primarily to obtain medical care, do not use any of the donor’s exclusion, and the purchase of health insurance. To qualify for the annual exclusion, do not result in gift tax, and, if they a gift must be one of a “present interest.” The transfer tax system is complex, are the only gifts made in any calendar In simple terms, this means that the and substantial effort is often required year, do not require the fi ling of a gift person receiving the gift must be able to transfer assets without paying tax return. These exclusions allow us to enjoy the gift immediately. A direct transfer taxes, whether gift or estate. not to worry about gift tax on routine gift to an individual clearly meets this The gifts described above are simple, small gifts and can be valuable estate qualifi cation, but sometimes a direct require little planning, require no planning tools. gift is not appropriate, either because returns, and, if done consistently over Imagine a couple with a potentially of the donee’s age or because of other time, can transfer a large amount of taxable estate who has three children circumstances. Most gifts to trusts do wealth without paying gift or estate tax. and fi ve grandchildren. Without the not qualify as a present interest, but imposition of any gift tax and without a trust will qualify if the benefi ciary fi ling any gift tax returns, they can: has the right, even for a limited time, (1) give away $208,000 each year by to take the gift out of the trust. Trusts making annual exclusion gifts to their 2 | miller nash llp | Estate Planning Advisor
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