In developing estate plans that seek to minimize taxes, there are a number of key figures and rates that a planner needs to keep in mind. Many of these are tied to cost of living adjustments so its important to keep a cheat sheet handy to make sure you are using the most up to date numbers.
Annual Gift Tax Exclusion: This is the amount that someone can give to another person during the calendar year without having to pay gift tax. Originally under IRC Sec. 2503 the annual gift exclusion was set at $10,000 but this figure is regularly adjusted for inflation and every few years is increased by $1,000. Since 2018, the annual gift tax exclusion amount has been $15,000 per beneficiary. For gifts in 2014-2017 the annual exclusion was $14,000 per beneficiary.
Annual Gift Tax Exclusion to Non-Citizen Spouses: $157,000 in 2020 up from $155,000 in 2019.
Applicable Exclusion Amount (AEA): This is the amount that someone can leave to their heirs free of estate tax. For decadents dying in 2020, the AEA is $11.58 million – in 2019 it was $11.4 million. In 2018 the AEA was $11.18 million and in 2017 it was $5.49 million.
Basis: The term “basis” refers to the tax value of an asset; it is usually measured by the date on which the asset was acquired. Capital Gains tax is paid based on the increase in value (gain) from the owner’s basis to the value when the asset is sold. For example, if you pay $20 for something and it increases over time to $100, you have a basis of $20 and a “capital gain” of $80. If you sell the asset, you pay capital gains tax based on that $80. In estate tax planning, you can minimize gain by giving things away upon death so that the person receiving the inheritance gets a “step up” in basis. Otherwise a gift during life results in a carry-over basis.
- Carry-Over Basis: If you give that property away during your life, the person who receives it has the same basis you had. This is “carry-over” basis. So if they sell it for $100, their basis is still $20 and they pay the tax on the $80 gain. Carry-over basis is generally undesirable, because the person who sells the asset has to pay the capital gains tax liability based on the original owner’s “carried over” basis.
- Step-Up Basis: If you die with an asset that has increased in value and it goes to someone, that person generally gets a “step up” in basis to the value measured at your date of death. Assume again that the asset you bought for $20 increases to $100 by the time you die. After you die your kids receive the asset from your estate (valued at $100), and they then sell the asset for $100. Your kids have $0 taxable capital gain because their basis got “stepped up” in your estate when you died. Strategies that target basis adjustment seek to eliminate carryover basis and give step up basis to your beneficiaries.
Estate and Gift Tax Rates: The following rates apply in calculating the estate tax for decedents dying in 2019 –
Generation Skipping Transfer Tax (GSST): The GST exemption for 2019 is $11.4 million up from $11.18 million in 2018.
State Estate Taxes: Currently 12 states and the district of Columbia have estate taxes. The states which have estate taxes for decedents dying in 2019 include Connecticut, District of Columbia, Hawaii, Illinois, Oregon, Maine, Maryland, Massachusetts, Minnesota, New York, Rhode Island, Vermont and Washington. As of 2019, estates over these amounts in the following state can face state estate tax liabilities ranging from 0% to as high as 20% depending on the specific state and size of the estate and whether the decedent had engaged in proper planning.
Listed below are the state exemption amounts for those states imposing an estate tax in 2019. Estates that are larger in these states may be subject to state estate taxes.
- Connecticut – $3,600,000
- District of Columbia – $11,400,000
- Hawaii – $11,400,000
- Illinois – $4,000,000
- Oregon – $1,000,000
- Maine – $11,400,000
- Maryland – $11,400,000
- Massachusetts – $1,000,000
- Minnesota – $2,700,000
- New York – $11,400,000
- Rhode Island – $1,561,719
- Vermont – $2,750,000
- Washington – $2,193,000
State Inheritance Taxes: An inheritance tax is a tax that is imposed on an heir when he or she receives assets from a deceased person’s estate. It’s not based on the overall value of the estate, rather it is based upon the value of the assets that the beneficiary received as well as the relationship between the deceased and the beneficiary. Currently 6 states have inheritance taxes – Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. (Maryland has both an estate tax and an inheritance tax).
All of the six states with an inheritance tax exempt surviving spouses. New Jersey exempts domestic partners as well. Most of the states also grant close descendants exemption from the tax. So descendants—children and grandchildren—are not taxed, either, in four of the states. Nebraska and Pennsylvania are the exception as immediate relatives beyond the spouse are subject to the inheritance tax – albeit at a much lower rate.
For 2019 State Inheritance Tax rates are as follows – the lowest percentages apply to the most closely related non-exempt relatives.
- Iowa: 5 percent to 15 percent
- Kentucky: 4 percent to 16 percent
- Maryland: 10 percent for all beneficiaries
- Nebraska: 1 percent to 18 percent
- New Jersey: 11 percent to 16 percent
- Pennsylvania: 4.5 percent to 15 percent