With tax season upon us, I thought I would take just a moment to give a very brief overview of the estate and gift tax scheme at the federal and Washington state levels. The amount of any estate tax (or death tax or inheritance tax) due upon your death depends on the size of your estate, the amount of gifts you made during your lifetime, the applicable exemptions at your death and the tax rate.
The amount of your estate that is subject to federal and state tax (the “taxable estate”) is equal to the fair market value on the date of your death of all of your assets (cash and securities, real estate, insurance, trusts, annuities, business interests and other assets) minus mortgages or other debts, estate administration expenses and the amount of property that passes to qualified charities or your surviving spouse. This final deduction, also known as the spousal exemption, is extremely important and is a key component of estate tax planning for larger estates.
Yes, gifts made during your life may be taxable. There is an annual exclusion of the first $13,000 (adjusted for inflation) to each individual which generally covers most gifts, but anything over $13,000 given to an individual (or $26,000 if gifted by a couple) is subject to gift tax. Gift amounts over the annual exclusion are subtracted from your “unified” lifetime exemption for gifts and estate. The current federal estate tax scheme provides for a $5 million combined “unified” exemption for gifts, both during your life and as your estate, which means that you can either give away your assets during your life or at your death and the first $5 million of assets is not taxed at the federal level. A strategy of lifetime gifting, if started early enough, is one very important estate tax reduction method, especially when considering not only federal but also Washington state estate taxes. Washington state does not tax lifetime giving, only gifts made at death (your taxable estate), so one way to potentially reduce Washington state estate tax is through aggressive gifting of assets prior to your death. This strategy must be implemented carefully and with proper planning so as to balance out any federal and state tax consequences as well as keeping sufficient assets to meet your retirement goals.
As mentioned above the current federal “unified” exemption for gift and estate tax is $5 million per individual. This exemption amount is currently in effect for 2011 and 2012 but set to revert back to $1 million in 2013. The Washington state exemption amount is $2 million per individual, but remember this is only on the taxable estate and does not apply to lifetime gifts. Additionally, the current federal exemption is portable to a surviving spouse, meaning any portion of the $5 million exemption that is unused by the first spouse to die gets added to the surviving souse’s $5 million exemption. This only applies to federal estate tax and not Washington state estate tax.
The current federal estate tax rate is 35%. This is set to increase in 2013 with the reduction in exemption amount. It is impossible to say what the political climate in 2012 or 2013 will be when any new estate tax scheme will be discussed by congress. Therefore it is best to build flexibility into any estate plan to allow a surviving spouse to disclaim up to the current federal estate exemption to take full advantage of whatever that amount may be.
The Washington state estate tax is computed as follows:
|Taxable estate, less the $2 million Washington state exemption is at Least||But Less Than||Initial Tax Amount||Plus Tax Rate %||On the amount above|
|Above $9,000,000||$1,440,000||19.00%||Above $9,000,000|
To discuss your estate planning goals and how I can help you accomplish them, please call me 206-660-9401 for a free consultation.