First, you may be wondering what federal estate and gift taxes even are?  Federal estate and gift taxes have been created to tax the transfer of substantial gifts during life (gift taxes) and at death (estate taxes) from one individual to another individual or entity.

Under current federal law, each individual has a lifetime exemption of $5.49 million against combined federal estate and gift taxes.  In other words, one individual can transfer $5.49 million over his or her lifetime and at death to family or anyone or anything else and pay nothing in federal estate and gift taxes.  As a result of the level at which the current lifetime exemption has been set, these taxes do not apply to most Americans.

There are also some additional ways in which individuals may shield their asset transfers from federal estate and gift taxes under current law:

• First, there is an unlimited marital deduction from federal estate and gift taxes.  As a result, when the first spouse dies, regardless of the size of the estate, there is no federal estate or gift tax applied against amounts that are transferred from the deceased spouse to the surviving spouse.
• Second, current law permits the deceased spouse to transfer any unused exemption against federal estate and gift taxes to the surviving spouse.  As a result, a married couple effectively has a $10.98 million lifetime exemption against federal estate and gift taxes.  In other words, a couple can transfer $10.98 million over their collective lifetimes to family or anyone or anything else and pay nothing in federal estate and gift taxes.
• Third, under current federal law, an individual may make a gift of up to $14,000 annually to another individual or entity free of estate and gift tax.  Provided the annual gift is $14,000 or less, the gift will not reduce the individual’s $5.49 million lifetime exemption against federal estate and gift taxes.  This annual gift tax exclusion is per individual, so a married couple can make annual gifts of $28,000 per child that are estate and gift tax free in the year that they are made and these gifts will not reduce the couple’s collective $10.98 million lifetime exemption against federal estate and gift taxes.

Under the federal Tax Cuts & Jobs Act, as introduced, the House of Representatives Ways and Means Committee majority tax staff indicates that the individual lifetime exclusion amount against estate taxes would increase from $5.49 million in 2017 to $10 million for tax years beginning after 2017 (or a $20 million lifetime exemption for a married couple).  Beginning after 2023, the federal estate tax would be repealed.  As a result, after 2023, an individual could transfer an unlimited amount of accumulated wealth at death, estate and gift tax free.  They estimate that these phased in changes would result in $172.2 billion in reduced federal taxes over the period 2018-2027.  The loss in federal revenue due to this change would be even higher if the change was not phased in.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Call 608-358-9413 to set-up a no-charge initial consultation.]