Source: https://www.rassmanlaw.com/estate-tax-considerations/
Timestamp: 2019-04-24 06:29:25+00:00

Document:
Benjamin Franklin is oft’ quoted as saying “there are only two certainties in life, death and taxes”. With a United States tax code hundreds of times longer today (according to the IRS, measuring ~3,700,000 words, roughly equivalent to the Harry Potter series) than it was in the 18th century, federal estate and gift taxes as high as 40%, federal income taxes as high as 37%, and federal capital gains taxes as high as 20%, Mr. Franklin couldn’t have been more prescient. That said, no one likes to pay more taxes than they must, and RassmanLaw offers forward-thinking estate planning counsel to preserve your hard-earned wealth and save and/or defer estate, gift and/or income taxes in the event of death.
In 2018, the U.S. Federal Gift Tax and the U.S. Federal Estate Tax are equal to 40%. Subject to certain exceptions (which are discussed below), this means that the federal government imposes a 40% tax on the value of gifts made by individuals during life and bequests made on death.
The government, however, grants to each individual an “exemption”, which in 2018 is equal to $11,200,000 (indexed annually for inflation) per individual. Simply put, this means that individuals, under our 2018 federal gift and estate tax laws, can gift during life or leave to beneficiaries on death, or some combination of the two, an aggregate amount of $11,200,000 without incurring a Federal Gift Tax or Federal Estate Tax; but every dollar gifted during life or passed at death exceeding $11,200,000 will incur a Federal Gift Tax and/or Federal Estate Tax of 40%.
In 2016, Father (“F”) gifts $1,000,000 to his Son (“S”). No Federal Gift Tax will be owed, because F can gift during his lifetime up to $11,200,000 in assets without incurring a Federal Gift Tax (although a federal gift tax return will need to be filed for 2016). F passes away in 2018 with $11,000,000 (net of liabilities) in assets remaining in his estate. Due to the fact that F gifted $1,000,000 to S in 2016, F on his death has only a $10,200,000 Federal Estate Tax Exemption remaining. Accordingly, F will owe a Federal Estate Tax of $320,000 – i.e. 40% of the difference between $11,000,000 (i.e. the assets remaining in F’s estate on his death) and $10,200,000 (i.e. F’s remaining Federal Estate Tax Exemption remaining on his death).
What follows are various estate, gift and income tax reduction and/or deferral opportunities, all of which are subject to certain important exceptions and requirements (which are beyond the scope of these illustrations).
Annual Federal Gift Tax Exclusion: Under Internal Revenue Code §2503, individuals (aka “donors”) can gift up to $15,000 (indexed annually for inflation) per year to others without incurring a Federal Gift Tax and without reducing such donor’s Federal Gift Tax or Federal Estate Tax Exemption.
Same facts as set forth in Example #1 above, except F applies his $15,000 annual gift tax exclusion to the $1,000,000 gift made to S in 2016. By doing so, F is deemed to have made only a $985,000 gift to S in 2016 (as opposed to a $1,000,000 gift). Accordingly, on F’s death in 2018, he will owe a Federal Estate Tax of $314,000 (as opposed to a tax of $320,000) – i.e. 40% of the difference between $11,000,000 (i.e. the assets remaining in F’s estate on his death) and $10,215,000 (i.e. F’s remaining Federal Estate Tax Exemption on his death).
Unlimited Federal Marital Gift Tax Deduction: Under Internal Revenue Code §2523, a spouse can gift during life to a U.S. citizen spouse an unlimited amount without incurring a Federal Gift Tax and without reducing the donor spouse’s Federal Gift Tax Exemption or Federal Estate Tax Exemption.
In 2016, Husband (“H”) gifts $1,000,000 to his U.S. citizen Wife (“W”). No Federal Gift Tax will be owed, because H can gift an unlimited amount to W during his lifetime (although a federal gift tax return will need to be filed for 2016). Assuming H passes away in 2018, and further assuming he has not made other taxable gifts during his lifetime, H will continue to have his full $11,200,000 Federal Estate Tax Exemption available to him on his death.
Unlimited Federal Marital Estate Tax Deduction: Under Internal Revenue Code §2056, a spouse can bequest on death to a U.S. citizen spouse an unlimited amount without incurring a Federal Estate Tax and without reducing the donor spouse’s Federal Estate Tax Exemption.
Same facts as set forth in Example #3 above. Further assume H has $12,000,000 (net of liabilities) in assets remaining in his estate on his death in 2018, and that H’s estate planning documents provide that H’s entire estate passes to W. Despite the fact that H has an $11,200,000 Federal Estate Tax Exemption available to him on his death, H will not owe a Federal Estate Tax because H can bequest on death to a U.S. citizen spouse an unlimited amount.
Same facts as set forth in Example #4 above, except that H’s estate planning documents provide that one-half (1/2) of his assets pass to W and one-half (1/2) to his son (“S”). Despite the fact that H has a $11,200,000 Federal Estate Tax Exemption available to him on his death, H will not owe a Federal Estate Tax because H can bequest on death to a U.S. citizen spouse an unlimited amount and because H’s $11,200,000 Federal Estate Tax Exemption is more than sufficient to absorb the $6,000,000 bequest made to S.
Portability: Under Internal Revenue Code §2010, any Federal Estate Tax Exemption unused by the first spouse to pass away can be used by the surviving spouse (i.e. “ported” to the surviving spouse”) on the first spouse’s death, provided an estate tax return is timely filed on the death of the first spouse electing “portability”.
Same facts as set forth in Example #5, wherein H passed away having an unused Federal Estate Tax Exemption of $5,200,000 – i.e. he had a $11,200,000 Federal Estate Tax Exemption available to him on his death, only $6,000,000 of which was used to absorb the $6,000,000 bequest made to S. Assuming (among other assumptions) that (i) W passes away after H, (ii) H’s executor timely filed an estate tax return electing “portability”; (iii) W had not remarried, (iv) W never exceeded her own annual gift tax exclusion, and (v) in year of W’s death, her Federal Estate Tax Exemption is $11,200,000, W will have a Federal Estate Tax Exemption of $16,400,000 available to her – i.e. her own $11,200,000 Federal Estate Tax Exemption plus H’s unused $5,200,000 Federal Estate Tax Exemption – meaning W can pass up to $16,400,000 in assets to her beneficiaries on her death without incurring a Federal Estate Tax; but every dollar exceeding $16,400,000 (if any) will be taxed at 40%.
Unlimited Charitable Deduction: Under Internal Revenue Code §2055, bequests made to qualified charities / non-profit organizations are deducted from the calculation of the decedent’s gross estate for purposes of calculating the Federal Estate Tax.
Father (“F”) passes away in 2018 with $15,000,000 (net of liabilities) in assets remaining in his estate. F’s estate planning documents provide that 10% of F’s estate (i.e. $1,500,000) passes to a specifically named, federally recognized non-profit organization, and the balance of his estate (i.e. $13,500,000) passes to Son (“S”). Under Internal Revenue Code §2055, the bequest to charity will be deducted from F’s estate, leaving him with an effective gross estate of $13,500,000. Accordingly, F will owe a Federal Estate Tax of $920,000 – i.e. 40% of the difference between $13,500,000 (i.e. F’s gross estate) and $11,200,000 (i.e. F’s remaining Federal Estate Tax Exemption remaining on his death).
Step-up / Step-down in Basis: Under Internal Revenue Code §1014, the tax basis of certain assets acquired from a decedent is equal to the fair market value of such asset as of the decedent’s date of death. Note, however, that some assets will not receive a “step-up” in basis (e.g. IRAs, U.S. Savings Bonds, Treasury Notes, accounts receivable in a business, etc.).
Father (“F”) passes away in 2018 owning a home free and clear of debt with a fair market value of $500,000 that he acquired in 1975 for $50,000. Under the terms of F’s estate planning documents (which hopefully included a Trust in order to avoid probate), F’s home passes to Son (“S”). Soon after F’s death, S sells the home for $500,000. Under Internal Revenue Code §1014, S will report no “gain” on the sale and thus owe no capital gain tax – i.e. the tax basis in the home “steps-up” from $50,000 (i.e. the basis the home had while F was alive) to $500,000 (i.e. the fair market value of the home on F’s death), leaving $0 gain.
Same facts as set forth in Example #8, except F sells the home in 2018 for $500,000 before he passes away. In this event, Internal Revenue Code §1014 does not apply. Accordingly, F will report “gain” on the sale of $450,000 – i.e. sale of $500,000 less F’s tax basis of $50,000 – and will owe a significant capital gain tax. Note, this example assumes F did not get the benefit of Internal Revenue Code §121, which, subject to certain important exceptions and requirements (which are beyond the scope of this illustration), may have allowed F the ability to exclude a significant portion of the gain from capital gain tax.

References: §2503
 §2523
 §2056
 §2010
 §2055
 §2055
 §1014
 §1014
 §1014
 §121