Taxation Concerns in Estate Planning

Taxes play a very important role in how to properly plan your estate. With all of the complex rules surrounding gift taxes, estate taxes and income taxes, it is imperative to put a lawyer in your corner who firmly understands the law and knows how to plan for all types of situations. At Law Offices of Karen Brady, P.C., we know what it takes to help you achieve your estate planning goals.

If you have questions regarding how your estate will be taxed, consult with our team today. We have been serving the needs of Arvada-area residents for more than 20 years.

Recent Changes in Estate Tax Law

In 2012, the U.S. Congress finally made some permanent changes to the estate and gift tax code. For the previous 12 years these sections of the code had been deliberately set to sunset, first in 2010 and then extended to 2012.

These changes are good news for taxpayers. First, the annual exclusion amount, or the "under the radar gift," has been increased to $14,000 per giver per recipient per calendar year. We call this the "under the radar gift" because there are no gift tax consequences for gifts that fall under this amount. The IRS considers this amount to be too little to count, therefore making a very useful planning tool. The $14,000 is set to increase each year to account for inflation.

Increased "Gift Card" Exemption

Even if you exceed the $14,000 amount, there may be little or no effect on your tax situation because the amount everyone can transfer free of gift or estate tax has been increased to $5.43 million and pegged to inflation. In our firm we used to call this the "coupon amount" but now we are referring to it as the "gift card." We use this analogy because this exemption amount is used up dollar for dollar each time you make a gift that exceeds the "under the radar" amount.

For example, what happens if you give your daughter a gift worth $10,000 in April and another $10,000 in December? The first $14,000 is excluded as your annual gift tax exclusion. The remaining $6,000 reduces the amount of your estate/gift tax lifetime exemption, so where it may have been $5,430,000 before your gift, it is now $5,424,000. If you make no other gifts during your lifetime that might use up your gift card, you can apply the entire $5,426,000 (or whatever it has risen to at the time of your death) to pass assets at your death free of estate tax.

Double the Exemption for Married Couples

And the news gets better. We used to tell clients that the gift cards were nontransferable and any unused amounts expired at the time of your death. As a result, we had to do some special drafting using Family Trusts or Credit Shelter Trusts so that the gift card of the first to die did not go to waste.

Now, spouses can take advantage of both gift cards without the legal gymnastics of transferring the assets of the first to die to a Family Trust. This is a new legal concept known as portability, and it means that the second spouse to die can add the unused gift card of the first spouse to his or her gift card. So many couples can easily plan with a possible gift card amount of over $10.8 million when the last of them dies.

There is a catch, though. Let's assume that Karl dies with an unused gift card of $5.4 million. Kathy has $5.4 million of her gift card available as well. So Kathy plans her estate assuming she has $10.8 million of gift card to apply before her estate would have to pay estate taxes. A few years after Karl died, Kathy remarries Noel. Then Noel dies, leaving Kathy widowed again. Because the "portability" of Karl's gift card applies only if Karl was Kathy's most recently deceased spouse, Kathy will no longer have Karl's unused gift card to use. Karl's gift card expires, but Kathy may be able to use any unused gift card that was not applied when Noel died.

With this new exemption amount and the introduction of portability, most people will not have to worry about gift or estate taxes at the federal level. In fact, married couples who did planning before 2013 with the use of credit shelter trusts (often called "Family Trusts" or "Exemption Trusts") should have their plans reviewed by an estate planning attorney. Not only are these credit shelter trusts no longer necessary, they will often result in higher capital gains taxes for your children than an updated plan that removes these types of trusts. We can also examine whether or not an IRA trust would be beneficial to your plan in order to avoid even more taxes.

Consult With an Experienced Estate and Gift Tax Lawyer in Colorado

Colorado does not have a state tax for gifts or estates, but many states do. As a result, you'll still want to consult with an estate tax lawyer if you own property outside Colorado or plan to call someplace other than Colorado your residence before you die.