Jan 21, 2022 | Estate Planning
Selecting beneficiaries for retirement benefits is different from choosing beneficiaries for other assets such as life insurance. With retirement benefits, you need to know the impact of income tax and estate tax laws in order to select the right beneficiaries. Although taxes shouldn’t be the sole determining factor in naming your beneficiaries, ignoring the impact of taxes could lead you to make an incorrect choice.
In addition, if you’re married, beneficiary designations may affect the size of minimum required distributions to you from your IRAs and retirement plans while you’re alive.
Paying income tax on most retirement distributions
Most inherited assets such as bank accounts, stocks, and real estate pass to your beneficiaries without income tax being due. However, that’s not usually the case with 401(k) plans and IRAs.
Beneficiaries pay ordinary income tax on distributions from 401(k) plans and traditional IRAs. With Roth IRAs and Roth 401(k)s your beneficiaries can receive the benefits free from income tax if all of the tax requirements are met. That means you need to consider the impact of income taxes when designating beneficiaries for your 401(k) and IRA assets.
For example, if one of your children inherits $100,000 cash from you and another child receives your 401(k) account worth $100,000, they aren’t receiving the same amount. The reason is that all distributions from the 401(k) plan will be subject to income tax at ordinary income tax rates, while the cash isn’t subject to income tax when it passes to your child upon your death.
Similarly, if one of your children inherits your taxable traditional IRA and another child receives your income-tax-free Roth IRA, the bottom line is different for each of them.
Naming or changing beneficiaries
When you open up an IRA or begin participating in a 401(k), you are given a form to complete in order to name your beneficiaries. Changes are made in the same way–you complete a new beneficiary designation form. A will or trust does not override your beneficiary designation form. However, spouses may have special rights under federal or state law.
It’s a good idea to review your beneficiary designation form at least every two to three years. Also, be sure to update your form to reflect changes in financial circumstances. Beneficiary designations are important estate planning documents. Seek legal advice as needed.
Designating primary and secondary beneficiaries
When it comes to beneficiary designation forms, you want to avoid gaps. If you don’t have a named beneficiary who survives you, your estate may end up as the beneficiary, which is not always the best result.
Your primary beneficiary is your first choice to receive retirement benefits. You can name more than one person or entity as your primary beneficiary. If your primary beneficiary doesn’t survive you or decides to decline the benefits (the tax term for this is a disclaimer), then your secondary (or “contingent”) beneficiaries receive the benefits.
Having multiple beneficiaries
You can name more than one beneficiary to share in the proceeds. You just need to specify the percentage each beneficiary will receive. Also, you should state who will receive the proceeds should a beneficiary not survive you.
In some cases, you’ll want to designate a different beneficiary for each account or have one account divided into sub-accounts. You’d do this to allow each beneficiary to use his or her own life expectancy in calculating required distributions after your death. This, in turn, can permit greater tax deferral (delay) and flexibility for your beneficiaries in paying income tax on distributions.
Avoiding gaps or naming your estate as a beneficiary
There are two ways your retirement benefits could end up in your probate estate. Probate is the court process by which assets are transferred from someone who has died to the heirs or beneficiaries entitled to those assets.
First, you might name your estate as the beneficiary. Second, if no named beneficiary survives you, your probate estate may end up as the beneficiary by default. If your probate estate is your beneficiary, several problems can arise.
If your estate receives your retirement benefits, the opportunity to maximize tax deferral by spreading out distributions may be lost. In addition, probate can mean paying attorney’s and executor’s fees and delaying the distribution of benefits.
Naming your spouse as a beneficiary
When it comes to taxes, your spouse is usually the best choice for a primary beneficiary.
A spousal beneficiary has the greatest flexibility for delaying distributions that are subject to income tax. In addition to rolling over your 401(k) or IRA to his or her IRA, a surviving spouse can decide to treat your IRA as his or her own IRA. This can provide more tax and planning options.
If your spouse is more than 10 years younger than you, then naming your spouse can also reduce the size of any required taxable distributions to you from retirement assets while you’re alive. This can allow more assets to stay in the retirement account longer and delay the payment of income tax on distributions.
Although naming a surviving spouse can produce the best income tax result, that isn’t necessarily the case with death taxes. One possible downside to naming your spouse as the primary beneficiary is that it will increase the size of your spouse’s estate for death tax purposes. This is because at your death, your spouse can inherit an unlimited amount of assets and defer federal death tax until both of you are deceased. However, this may result in death tax or increased death tax when your spouse dies.
If your spouse’s taxable estate for federal tax purposes at his or her death exceeds the applicable exclusion amount , then federal death tax may be due at his or her death.
Naming other individuals as beneficiaries
You may have some limits on choosing beneficiaries other than your spouse. No matter where you live, federal law dictates that your surviving spouse be the primary beneficiary of your 401(k) plan benefit unless your spouse signs a timely, effective written waiver. As well, if you live in one of the community property states, your spouse may have rights related to your IRA regardless of whether he or she is named as the primary beneficiary.
Keep in mind that a nonspouse beneficiary cannot roll over your 401(k) or IRA to his or her own IRA. However, a nonspouse beneficiary may be able to roll over all or part of your 401(k) benefits to an inherited IRA.
Naming a trust as a beneficiary
You must follow special tax rules when naming a trust as a beneficiary, and there may be income tax complications. Seek legal advice before designating a trust as a beneficiary.
Naming a charity as a beneficiary
In general, naming a charity as the primary beneficiary will not affect required distributions to you during your lifetime. However, after your death, having a charity named with other beneficiaries on the same asset could affect the tax-deferral possibilities of the noncharitable beneficiaries, depending on how soon after your death the charity receives its share of the benefits.
Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.
Nov 4, 2021 | Education Planning, Estate Planning
When you contribute to a 529 plan, you’ll not only help your child, grandchild, or other loved one pay for college, but you’ll also remove money from your taxable estate. This will help you minimize your tax liability and preserve more of your estate for your loved ones after you die. So, if you’re thinking about contributing money to a 529 plan, it pays to understand the gift and estate tax rules.
Overview of gift and estate tax rules
If you give away money or property during your life, you may be subject to federal gift tax. These transfers may also be subject to tax at the state level.
Federal gift tax generally applies if you give someone more than the annual gift tax exclusion amount. Currently, $14,000, during the tax year. There are several exceptions, though, including gifts you make to your spouse. That means you can give up to $15,000 each year, to as many individuals as you like, federal gift tax free.
Contributions to a 529 plan are treated as (federal) gifts to the beneficiary
A contribution to a 529 plan is treated under the federal gift tax rules as a completed gift from the donor to the designated beneficiary of the account. Such contributions are considered present interest gifts and qualify for the annual federal gift tax exclusion. This means that you can contribute up to $15,000 per year to the 529 account of any beneficiary without incurring federal gift tax.
So, if you contribute $16,000 to your daughter’s 529 plan in a given year, you’d ordinarily apply this gift against your $15,000 annual gift tax exclusion. This means that although you’d need to report the entire $16,000 gift on a federal gift tax return, you’d show that only $1,000 is taxable. Bear in mind, though, that you must use up your federal applicable exclusion amount ( $11,700,000 in 2021) before you’d actually have to write a check for the gift tax.
Special rule if you contribute over $14,000 in a year
Section 529 plans offer a special gifting feature. Specifically, you can make a lump-sum contribution to a 529 plan of up to $70,000, elect to spread the gift evenly over five years, and completely avoid federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period. A married couple can gift up to $140,000.
If you contribute more than $75,000 ($140,000 for joint gifts) to a particular beneficiary’s 529 plan in one year, the averaging election applies only to the first $75,000 ($150,000 for joint gifts). The remainder is treated as a gift in the year the contribution is made.
What about gifts from a grandparent?
Grandparents need to keep the federal generation-skipping transfer tax (GSTT) in mind when contributing to a grandchild’s 529 account. The GSTT is a tax on transfers made during your life and at your death to someone who is more than one generation below you. This would be someone like a grandchild. The GSTT is imposed in addition to (not instead of) federal gift and estate taxes. Like the basic gift tax exclusion amount, though, there is a GSTT exemption (also 11,580,000 in 2020). No GSTT will be due until you’ve used up your GSTT exemption, and no gift tax will be due until you’ve used up your applicable exclusion amount.
If you contribute no more than $15,000 to your grandchild’s 529 account during the tax year, there will be no federal tax consequences. Your gift qualifies for the annual federal gift tax exclusion, and it is also excluded for purposes of the GSTT.
If you contribute more than $15,000, you can elect to treat your contribution as if made evenly over a five-year period. Only the portion that causes a federal gift tax will also result in a GSTT.
What if the owner of a 529 account dies?
If the owner of a 529 account dies, the value of the 529 account will not usually be included in his or her estate. Instead, the value of the account will be included in the estate of the designated beneficiary of the 529 account.
There is an exception, though. It would be if you made the five-year election and died before the five-year period ended. In this case, the portion of the contribution allocated to the years after your death would be included in your federal gross estate.
Some states have an estate tax like the federal estate tax; many states calculate estate taxes differently. Review the rules in your state so you know how your 529 account will be taxed at your death.
When the account owner dies, the terms of the 529 plan will control who becomes the new account owner. Some states permit the account owner to name a contingent account owner. They would assume all rights if the original account owner dies. In other states, account ownership may pass to the designated beneficiary. Alternatively, the account may be considered part of the account owner’s probate estate and may pass according to a will. Or through the state’s intestacy laws if there is no will.
What if the beneficiary of a 529 account dies?
If the designated beneficiary of your 529 account dies, look to the rules of your plan for control issues. Generally, the account owner retains control of the account. The account owner may be able to name a new beneficiary or else make a withdrawal from the account. The earnings portion of the withdrawal would be taxable, but you won’t be charged a penalty for terminating an account upon the death of your beneficiary.
Keep in mind that if the beneficiary dies with a 529 balance, the balance may be included in the beneficiary’s taxable estate.
Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.
Aug 12, 2021 | Estate Planning, Life Insurance
Life insurance has come a long way since the days when it was known as burial insurance and used mainly to pay for funeral expenses. Today, life insurance is a crucial part of many estate plans. You can use it to leave much-needed income to your survivors. Or, provide for your children’s education, or pay off your mortgage. It can simplify the transfer of assets. Life insurance can also be used to replace wealth lost due to the expenses and taxes that may follow your death. Or, it can be used to make gifts to charity at relatively little cost to you.
We will illustrate how life insurance can help you plan your estate wisely. Let’s compare what happened upon the death of two friends. Frank, who bought life insurance, and Dave, who did not.
(Please note: that these illustrations are hypothetical)
Life insurance can protect your survivors financially by replacing your lost income
Frank bought life insurance to help ensure that his survivors wouldn’t suffer financially when he died. When Frank died and his paycheck stopped coming in, his family had enough money to maintain their lifestyle and live comfortably for years to come.
And since Frank’s life insurance proceeds were available very quickly, his family had cash to meet their short-term financial needs. Life insurance proceeds left to a named beneficiary don’t pass through the process of probate. Thus, Frank’s family didn’t have to wait until his estate was settled to get the money they needed to pay bills.
But Dave didn’t buy life insurance, so his family wasn’t so lucky. Even though Dave left his assets to his family in his will, those assets couldn’t be distributed until after the probate of his estate was complete. Probate typically takes six months or longer. Dave’s survivors had none of the financial flexibility that a life insurance policy would have provided in the difficult time following his death.
Life insurance can replace wealth that is lost due to expenses and taxes
Frank planned ahead and bought enough life insurance to cover the potential costs of settling his estate. Including taxes, fees, and other debts that his estate would have to pay. By comparison, these expenses took a big bite out of Dave’s estate. His estate had to sell valuable assets to pay the taxes and expenses that arose as a result of his death.
Life insurance lets you give to charity, while your estate enjoys an estate tax deduction
Using life insurance, Frank was able to leave a substantial gift to his favorite charity. Since gifts to charity are estate tax deductible, this gift was not subject to estate taxes when he died. Dave always dreamed of leaving money to his alma mater. However, his family couldn’t afford to give any money away when he died.
Life insurance won’t increase estate taxes–if you plan ahead
Before buying life insurance, Frank talked to his attorney about the potential tax consequences. Frank’s attorney told him that if he was leaving behind a taxable estate worth less than a certain amount, his survivors generally wouldn’t owe estate taxes on a life insurance policy left to them. Frank’s estate was larger than that. Frank and his attorney put a plan in place that helped minimize the estate tax burden on his family.
Be like Frank, not like Dave
Throughout his life, Dave worked hard to support his family. Frank did, too, but went one step further–he bought life insurance to protect his family after his death. Here’s how you can be like Frank:
- Use life insurance to ensure that your family has access to cash to help them meet both their short-term and long-term financial needs
- Plan ahead–buy enough life insurance to cover the potential costs of settling your estate and to ensure that the assets you leave to your survivors aren’t less than you intended
- Consider using life insurance to give to charity
- Consult an experienced attorney about income and estate tax consequences before purchasing life insurance
Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.
May 13, 2021 | Estate Planning
A beneficiary is the person or entity you name (i.e., designate) to receive the death benefits of a life insurance policy. Some states require that your beneficiary have an insurable interest in your life or be related to you, while others have no such restriction.
If you do not want to name an individual or entity as your beneficiary, you can name your own estate. Any proceeds are distributed with your other assets according to your will. Please note, naming your estate as beneficiary may have disadvantages. For example, in many states, life insurance proceeds are exempt from the claims of your creditors when there is a named beneficiary, but not when your estate is your named beneficiary.
Revocable and irrevocable beneficiaries
The beneficiary can be either revocable or irrevocable. A revocable beneficiary can be changed at any time. Once named, an irrevocable beneficiary cannot be changed without his or her consent.
Primary and contingent beneficiaries
You may name multiple beneficiaries if you choose. There are no legal restrictions (and few company restrictions) on the number of beneficiaries you can designate.
You can name as many beneficiaries as you want, subject to procedures set in the policy. The beneficiary to whom the proceeds go first is called the primary beneficiary. Secondary or contingent beneficiaries are entitled to the proceeds only if they survive both you and the primary beneficiary. It’s important to name a contingent beneficiary. If you and your primary beneficiary die simultaneously, the Uniform Simultaneous Death Act provides that the beneficiary will be presumed to have died first. Naming a contingent beneficiary avoids having the proceeds flow to your estate.
Multiple beneficiaries
If you name multiple beneficiaries, you must also specify how much each beneficiary will receive. You may not want to give each beneficiary an equal share, so you must state how the proceeds should be divided. Because of the numerous interest and dividend adjustments that the insurance company must make, the death benefit check often does not equal the policy’s face value. It’s wise to distribute percentage shares to your beneficiaries, or to designate one beneficiary to receive any leftover balance.
How do you name or change a beneficiary?
When you buy life insurance, you will indicate your beneficiaries on the application. When changing a beneficiary, the insurer will provide you with a beneficiary designation form. Unless one or more of the beneficiaries is irrevocable, you only need to list the names of the beneficiaries, sign the form, and date it. This will automatically revoke any previous designations by writing this in on the change-of-beneficiary form. Be sure to check and update your beneficiary designations upon certain life events.
Don’t make the mistake of thinking that you can change your beneficiary in your will. A change of beneficiary made in your will does not override the beneficiary designation of your life insurance policy. If you want to change the beneficiary of your life insurance, execute a change-of-beneficiary form. Do not rely on your will to do so.
Why designating the proper beneficiary is important
You should name both primary and contingent beneficiaries. If you have not named one or more beneficiaries, the proceeds pass to your estate at your death. Proceeds paid to your estate are subject to probate and will incur all of the expenses and delays associated with settling an estate. Named beneficiaries receive proceeds almost immediately after your death, and probate is bypassed. In addition, proceeds passing to your estate are subject to the claims of creditors. Most states exempt life insurance proceeds from creditors when there’s a named beneficiary.
Other considerations when designating beneficiaries
If you become incompetent, you cannot name or change a beneficiary. You’re incompetent only if you are legally declared to be so. The test is similar to the test regarding the making of wills or any other legal contract.
Do not name a minor as a beneficiary unless you also appoint a guardian in your will or use a trust. If you do name a minor as a beneficiary, and you do not appoint a guardian or use a trust, the probate court will appoint a guardian for you. In states that have adopted the Uniform Transfers to Minors Act, it’s possible to create a custodial account of the minor after the death of the insured to receive the child’s share of the death proceeds.
Your right to change a beneficiary may be limited by a divorce decree or settlement agreement. In some cases, divorce allows a policyowner to change the beneficiary, even if the beneficiary is irrevocable. In other cases, the policyowner may be prohibited from changing the beneficiary. Or, may be required to name a divorced spouse or children as irrevocable beneficiaries.
If you’re a minor
In some states, if you (the insured) are a minor, you can name only a certain class of persons as beneficiaries. That class generally includes your spouse, parents, grandparents, and brothers or sisters. Your parents or legal guardians will also have to sign the application for life insurance.
At Sterling Group, We Empower You to Protect Yourself
We offer a a diverse suite of life insurance carriers that fit you and your specific needs. We can also help you select the best choice as to who will be designated as your beneficiary to your life insurance policy. Contact us today for your complimentary consultation!
Mar 2, 2021 | Estate Planning
Whether you’re seeking to manage your own assets, control how your assets are distributed after your death, or plan for incapacity, trusts can help you accomplish your estate planning goals. Their power is in their versatility. Many types of trusts exist, each designed for a specific purpose.
What is a trust?
A trust is a legal entity that holds assets for the benefit of another. Basically, it’s like a container that holds money or property for somebody else. You can put practically any kind of asset into a trust. This includes cash, stocks, bonds, insurance policies, real estate, and artwork. The assets you choose to put in a trust depend largely on your goals.
For example, if you want the trust to generate income, you may want to put income-producing securities, such as bonds, in your trust. Or, if you want your trust to create a pool of cash that may be accessible to pay any estate taxes due at your death or to provide for your family, you might want to fund your trust with a life insurance policy.
When you create and fund a trust, you are known as the grantor. Or, sometimes known as the settlor or trustor. The grantor names people, known as beneficiaries, who will benefit from the trust. Beneficiaries are usually your family and loved ones but can be anyone, even a charity.
Beneficiaries may receive income from the trust or may have access to the principal of the trust either during your lifetime or after you die. The trustee is responsible for administering the trust, managing the assets, and distributing income and/or principal according to the terms of the trust. Depending on the purpose of the trust, you can name yourself, another person, or an institution, such as a bank, to be the trustee. You can even name more than one trustee if you like.
Why create a trust?
Trusts can be used for many purposes, they are popular estate planning tools. A trust can:
- Minimize estate taxes
- Shield assets from potential creditors
- Avoid the expense and delay of probating your will
- Preserve assets for your children until they are grown (in case you should die while they are still minors)
- Create a pool of investments that can be managed by professional money managers
- Set up a fund for your own support in the event of incapacity
- Shift part of your income tax burden to beneficiaries in lower tax brackets
- Provide benefits for charity
The type of trust used, and the mechanics of its creation, will differ depending on what you are trying to accomplish. You may need more than one type of trust to accomplish all of your goals. And since some of the following disadvantages may affect you, discuss the pros and cons of setting up any trust with your attorney and financial professional before you proceed:
- A trust can be expensive to set up and maintain. trustee fees, professional fees, and filing fees must be paid
- Depending on the type of trust you choose, you may give up some control over the assets in the trust
- Maintaining the trust and complying with recording and notice requirements can take up considerable time
- Income generated by trust assets and not distributed to trust beneficiaries may be taxed at a higher income tax rate than your individual rate
The duties of the trustee
The trustee of the trust is a fiduciary, someone who owes a special duty of loyalty to the beneficiaries. The trustee must act in the best interests of the beneficiaries at all times. They must preserve, protect, and invest the trust assets for the benefit of the beneficiaries. The trustee must also keep complete and accurate records, exercise reasonable care and skill when managing the trust, prudently invest the trust assets, and avoid mixing trust assets with any other assets, especially his or her own. A trustee lacking specialized knowledge can hire professionals such as attorneys, accountants, brokers, and bankers if it is wise to do so. However, the trustee can’t merely delegate responsibilities to someone else.
Although many of the trustee’s duties are established by state law. Others, are defined by the trust document. If you are the trust grantor, you can help determine some of these duties when you set up the trust.
Living (revocable) trust
A living trust is a special type of trust. It’s a legal entity that you create while you’re alive to own property such as your house, a boat, or mutual funds. Property that passes through a living trust is not subject to probate. It doesn’t get treated like the property in your will. Instead, the trustee will transfer the assets to the beneficiaries according to your instructions. The transfer can be immediate. Or if you want to delay the transfer, you can direct that the trustee hold the assets until some specific time.
Living trusts are attractive because they are revocable. You maintain control. You can change the trust or even dissolve it for as long as you live. Living trusts are also private. Unlike a will, a living trust is not part of the public record. No one can review details of the trust documents unless you allow it.
Living trusts can also be used to help you protect and manage your assets if you become incapacitated. If you can no longer handle your own affairs, your trustee (or a successor trustee) steps in and manages your property. Your trustee has a duty to administer the trust according to its terms, and must always act with your best interests in mind. In the absence of a trust, a court could appoint a guardian to manage your property.
Despite these benefits, living trusts have some drawbacks. Assets in a living trust are not protected from creditors, and you are subject to income taxes on income earned by the trust. In addition, you cannot avoid estate taxes using a living trust.
Irrevocable trusts
Unlike a living trust, an irrevocable trust can’t be changed or dissolved once it has been created. You generally can’t remove assets, change beneficiaries, or rewrite any of the terms of the trust. Still, an irrevocable trust is a valuable estate planning tool. First, you transfer assets into the trust–assets you don’t mind losing control over. You may have to pay gift taxes on the value of the property transferred at the time of transfer.
Provided that you have given up control of the property, all of the property in the trust, plus all future appreciation on the property, is out of your taxable estate. That means your ultimate estate tax liability may be less, resulting in more passing to your beneficiaries. Property transferred to your beneficiaries through an irrevocable trust will also avoid probate. As well,, property in an irrevocable trust may be protected from your creditors.
There are many different kinds of irrevocable trusts. There are some trusts have special provisions and are used for special purposes. Some irrevocable trusts hold life insurance policies or personal residences. You can even set up an irrevocable trust to generate income for you.
Testamentary trusts
Trusts can also be established by your will and do not come into existence until your will is probated. At that point, selected assets passing through your will can “pour over” into the trust. From that point on, these trusts work very much like other trusts. The terms of the trust document control how the assets within the trust are managed and distributed to your heirs. You have a say in how the trust terms are written. These types of trusts give you a certain amount of control over how the assets are used, even after your death.
Finding a professional you trust starts here
A trust is a great estate planning tool to manage your assets. If you’re considering adding a trust to your estate planning, Sterling Group can help. We can provide you with the expert financial knowledge to help you make the best decisions for your financial goals. Connect with one of our advisors today for your complimentary consultation.
Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.
Oct 13, 2020 | Estate Planning
If you give away money or property during your life, those transfers may be subject to federal gift and estate tax and perhaps state gift tax. The money and property you own when you die (i.e., your estate) may also be subject to federal gift and estate tax and some form of state death tax. These property transfers may also be subject to generation-skipping transfer taxes. You should understand all of these taxes, especially since the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the 2001 Tax Act), the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act), and the American Taxpayer Relief Act of 2012 (the 2012 Tax Act). The 2001, 2010, and 2012 Tax Acts contain several changes that make estate planning much easier.
Federal gift and estate tax–background
Under pre-2001 Tax Act law, no federal gift and estate tax was imposed on the first $675,000 of combined transfers (those made during life and those made at death). The tax rate tables were unified into one–that is, the same rates applied to gifts made and property owned by persons who died in 2001. Like income tax rates, gift and estate tax rates were graduated. Under this unified system, the recipient of a lifetime gift received a carryover basis in the property received, while the recipient of a bequest, or gift made at death, got a step-up in basis (usually fair market value on the date of death of the person who made the bequest or gift).
The 2001 Tax Act, the 2010 Tax Act, and the 2012 tax Act substantially changed this tax regime.
Federal gift and estate tax–current
The 2001 Tax Act increased the applicable exclusion amount for gift tax purposes to $1 million through 2010. The applicable exclusion amount for estate tax purposes gradually increased over the years until it reached $3.5 million in 2009. The 2010 Tax Act repealed the estate tax for 2010 (and taxpayers received a carryover income tax basis in the property transferred at death), or taxpayers could elect to pay the estate tax (and get the step-up in basis). The 2010 Tax Act also re-unified the gift and estate tax and increased the applicable exclusion amount to $5,120,000 in 2012. The top gift and estate tax rate is 35 percent in 2012. The 2012 Tax Act increased the applicable exclusion amount to $5,250,000 and the top gift and estate tax rate to 40 percent in 2013.
However, many transfers can still be made tax free, including:
- Gifts to your U.S. citizen spouse; you may give up to $143,000 in 2013 ($139,000 in 2012) tax free to your noncitizen spouse
- Gifts to qualified charities
- Gifts totaling up to $14,000 (in 2013, $13,000 in 2012) to any one person or entity during the tax year, or $28,000 (in 2013, $26,000 in 2012) if the gift is made by both you and your spouse (and you are both U.S. citizens)
- Amounts paid on behalf of any individual as tuition to an educational organization or to any person who provides medical care for an individual
Federal generation-skipping transfer tax
The federal generation-skipping transfer (GST) tax imposes tax on transfers of property you make, either during life or at death, to someone who is two or more generations below you, such as a grandchild. The GST tax is imposed in addition to, not instead of, federal gift and estate tax. You need to be aware of the GST tax if you make cumulative generation-skipping transfers in excess of the GST tax exemption, $5,250,000 in 2013. A flat tax equal to the highest estate tax bracket in effect in the year you make the transfer (40 percent in 2013) is imposed on every transfer you make after your exemption has been exhausted.
State transfer taxes
Currently, Connecticut imposes a gift tax, and a few states impose a generation-skipping transfer tax. Some states also impose a death tax, which could be in the form of estate tax, inheritance tax, or credit estate tax (also known as a sponge or pickup tax). Contact an attorney or your state’s department of revenue or taxation to find out more information
If you are planning to give away money or property at some point in your lifetime, having the right current financial strategies can help you achieve your goals for yourself and the next generation. Call us to learn more about the comprehensive services we can offer to you.
