Serving Southern California Families With Strategic Tax Preservation Solutions

Most people have heard the expression, “the only two things that are sure in life are death and taxes.” Nowhere is this truer than in dealing with estate taxes, the area of the law where death and taxes intersect. Many people are unfamiliar with the concept of estate taxes, or only think of them as a “rich person tax.” While it is true that estate taxes are only levied on estates worth a certain amount of money, more people are subject to estate taxes than they may realize. In fact, if you are a property owner, business owner, or inherited generational wealth yourself, there is a good possibility that your heirs may have to pay an estate tax. However, there are multiple legal strategies to reduce or even eliminate what your heirs may be responsible for paying.

This is why consulting an experienced estate tax attorney is essential for everyone who is considering drafting a will or estate planning. Being aware of whether your heirs may be responsible for paying an estate tax, and how to reduce their burden, is imperative for everyone. If you or a loved one is estate planning or considering drafting a will, you must contact our experienced and dedicated estate tax planning lawyer today.

What is an Estate Tax?

Estate taxes are also called “death taxes.” The estate tax is a special type of tax applied to someone’s estate after they pass away. In actuality, it is neither a death tax nor an inheritance tax, but more accurately a transfer tax.

There are three distinct aspects to federal wealth transfer taxes that comprise what is called the Unified Transfer Tax:

•       Estate Taxes
•       Gift Taxes
•       Generation-Skipping Transfer Taxes

Legal planning to avoid or minimize these transfer taxes is both a prudent and an important aspect of comprehensive estate planning. Hiring the right tax planning attorney is vital.

The most recent iteration of the federal estate, gift, and generation-skipping transfer tax was signed into law by President Trump on December 22, 2017, as part of the Tax Cuts and Jobs Act of 2017 (TCJA 2017). There are a few things you ought to know about this law, which took effect on January 1, 2018. Specifically, you should know the “numbers” governing transfers subject to estate, gift, and generation-skipping transfer taxation.

What is the Federal Estate Tax Exemption?

A $5 million exemption, as indexed for inflation, was signed into law on December 17, 2010, under the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (TRA 2010). By 2017, the federal estate tax exemption had risen to $5.49 million per individual due to the inflation feature (and a nearly “automatic”* $10.98 million for married couples who follow very specific requirements at the death of the first spouse). With the stroke of his pen on December 22, 2017, President Donald Trump increased this exemption to $11,200,000 per individual (and $22,400,000 for married couples). The tax rate for amounts above what can be exempted remains at 40%.

*See “Portability” below for more on this.

What is the Lifetime Gift Tax Exemption and Annual Gift Tax Exclusion?

The TCJA 2017 continues the concept of a unified exemption that ties together the gift tax and the estate tax. This means that, to the extent you utilize your lifetime gift tax exemption while living, your federal estate tax exemption at death will be reduced accordingly. Your unified lifetime gift and estate tax exemption in 2017 was $5.49 million and is now the same as the federal estate tax exemption of $11,200,000 per individual (and $22,400,000 for married couples). Likewise, the top tax rate is 40%. Note: Gifts made within your annual gift exclusion amount do not count against your unified lifetime gift and estate tax exemption.

So, how much is this annual gift exclusion?

The annual gift exclusion has increased to $15,000 due to its inflation adjustment. This is up from $14,000 for 2017. Married couples can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $30,000 to as many individuals as they choose each year, whether both spouses contribute equally or if the entire gift comes from one spouse. In the latter instance, the couple must file an IRS Form 709 Gift Tax return and elect “gift-splitting” for the tax year in which such a gift was made. Having the right tax planning attorney in Bakersfield can make all the difference. 

What is the Generation-Skipping Transfer Tax Exemption?

So, what is this GSTT? Basically, it is a transfer tax on property passing from one generation to another, that is, two or more generational levels below the transferring generation. For instance, a transfer from a grandparent to a grandchild or from an individual to another unrelated individual who is more than 37.5 years younger than the transferor.

Properly done, this can transfer significant wealth between generations.

The amount that can escape federal estate taxation between generations, otherwise known as the Generation-Skipping Transfer Tax Exemption (GSTT), is unified with the federal estate tax exemption and the lifetime gift tax exemption at $11,200,000 per individual (and $22,400,000 for married couples, subject to certain specific requirements). As with estate and gift taxes, the top GSTT tax rate is 40%.

What is “Portability”?

The American Taxpayer Relief Act of 2012 (ATRA 2012) made “permanent” a new concept in estate planning for married couples, ostensibly rendering traditional estate tax planning unnecessary. This concept, called “portability,” means that a surviving spouse can essentially inherit the estate tax exemption of the deceased spouse without the use of “A-B Trust” planning. As with most tax laws, however, the devil is in the details. For example, unless the surviving spouse files a timely (within nine months of death) Form 709 Estate Tax Return and complies with other requirements, the portability may be unavailable.

In addition, married couples will not be able to use the GSTT exemptions of both spouses if they elect to use “portability” as the means to secure their respective estate tax exemptions. Furthermore, reliance on “portability” in the context of blended families may result in unintentional disinheritances and other unpleasant consequences.

If you are concerned about how your current estate and gift planning may function in light of ATRA 2012, and thereafter, then we encourage you to schedule a consultation.

What are California State Estate Taxes?

California’s estate tax system is commonly referred to as a “pick up” tax. This is because California picks up all or a portion of the credit for state death taxes allowed on the federal estate tax return (federal form 706 or 706NA). Since there is no longer a federal credit for state estate taxes on the federal estate tax return, there is no longer a basis for the California estate tax.

California has neither an estate tax (a tax paid by the estate) nor an inheritance tax (a tax paid by a recipient of a gift from an estate). This means that, while you may be responsible for a federal estate tax, you don’t have to worry about California state estate taxes. An experienced attorney can explain the difference in more detail and ensure you don’t accidentally “double dip” by paying the State of California money to which it isn’t entitled.

What Should I Do to Avoid My Heirs Having to Pay Estate Taxes?

Everyone wants their loved ones to be able to enjoy their inheritance worry-free and with a minimum of hassle. In many instances, a well-drafted estate plan and solid will can ensure your heirs are well cared for. However, depending on your precise financial situation, you may need to account for estate taxes. It is not uncommon for unsuspecting heirs to learn their inheritance comes with the “attached strings” of unexpected, often hefty taxes and fees. If your loved ones are unprepared, they may find themselves entangled in a potentially messy and time-consuming legal mess as they attempt to calculate and pay off estate taxes. Don’t place your loved ones in that position.

If you or a loved one needs to estate plan and wants to ensure your heirs aren’t faced with unexpected estate taxes, contact the Law Offices of Robert H. Brumfield, P.C., today. Robert Brumfield and his compassionate, caring legal team understand that thinking about estate taxes may be unpleasant. However, planning for such a possibility is the only guaranteed way to protect your loved ones. It’s better to be prepared and to have contingency plans in place rather than allow your heirs to be surprised. Don’t hesitate. If you or a loved one is estate planning and needs to ensure your loved ones aren’t responsible for hefty estate taxes, call 661-384-6940 to schedule your free consultation today.