Federal Estate Tax Clarity Under New Reform
By Margaret Menicucci, Attorney & Counselor
You need a crystal ball to know how future tax reform will change current estate tax exemptions and rates. But, you don’t need a crystal ball to have clarity about the current estate tax thresholds and rates. Understanding current laws will help you conduct your estate planning and year-end giving as it stands now. It will also help you to evaluate proposed changes to the tax code that will emerge as tax reform is debated and implemented. The major rules for federal taxation for passing on your estate at your death (and during your life) are as follows:
What is Staying the Same
• Gifts made to your spouse during your life and at death are excluded from federal taxation. Gifts to charitable organizations at your death are also estate tax free.
• For gifts made to anyone other than your spouse (e.g. children, siblings, friends), the current federal gift and estate tax credit (called the Unified Credit) is $5,490,000 per person. Married couples have a credit of up to $10,980,000. This credit applies both to gifts made during your lifetime and gifts of your assets upon death.
• The 2017 tax rate on the part of an estate that exceeds $5,490,000 for a single person and $10,980,000 for a married couple is 40%. For example, if a single person’s estate is worth $6,000,000, then the 40% tax rate will apply to $510,000 in assets.
• In 2017, Annual Exclusion enables you to give as much as $14,000 to a person other than your spouse without using any of your Unified Credit. Because the Annual Exclusion belongs to the individual making the gift, a married couple can give up to $28,000.
• Gifts of capital assets at death (like real property and stocks) receive a step-up in basis as of the date of death. This means that capital gains tax would only be owed on the difference between the sale price of the asset and the value on the date of the previous owner’s death. Because this step-up in basis can significantly reduce the capital gains tax that would be imposed, many people wait to transfer real property at death, rather than during their lifetime.
What is Changing
• In 2018, the Unified Credit increases to $5,600,000 per person and to $11,200,000 for married couples.
• In 2018, the Annual Exclusion increases to $15,000.
What is Still Being Debated
• To take effect in 2018, the Unified Credit would double to about $11 million per person, or $22 million for married couples.
Avoid High Estate Taxes with a Conservation Easement
High-valued rural land can place families into the zone of estate taxation. Donation of a conservation easement on all or a portion of the property will reduce the value of the estate while maintaining the farm or ranch for future generations. In some circumstances, a conservation easement donation results in an additional exclusion of up to $500,000 of gross estate assets. When qualifying as a charitable donation, the conservation easement can reduce income tax liability for the donor. Click here to learn more about conservation easements.
For most people, including owners of valuable rural land, the generous $5.6 million Unified Credit eliminates the risk of paying estate taxes in the first place. Regardless of the size of your estate, thoughtful planning remains critical to preserve your assets in the event of disability, to direct the way your estate passes to loved ones, and to minimize probate costs. At Braun & Gresham we help families and individuals achieve their estate planning and lifetime giving goals. Give us a call at 512-894-5426 to discuss your estate planning needs and questions.