Saturday, September 20, 2014

Overview of Inheritance and Estate Taxes

 

Overview of Estate and Inheritance Tax Law.

 

            Under current law U.S. citizens and residents must pay taxes to the federal government on transfer of property both during life and at death.  These taxes are due under three separate tax systems: the estate tax, the generation-skipping transfer tax and the gift tax.  Currently the top tax rate for all three taxes is 35%.  The estate, gift and generation-skipping transfer taxes have a 5 million dollar exemption for individuals (10 million for couples) during the tax years 2011 and 2012.  The estate tax exemption is “portable” which means that when one spouse dies the unused amount goes to the surviving spouse and can be used at his or her death. 

 

            Currently, each individual can make an absolutely tax-free gift of $13,000.00 per donee ($26,000.00 for married couples) per year.  If an individual or couple gives a gift exceeding the $13,000.00 ($26,000.00) annual exclusion amount, then it becomes a taxable gift.  To the extent that such a gift is taxable, it reduces the 5 million dollar exemption amount from the estate tax.  For example, if an individual makes a 1 million dollar taxable gift in 2011 and dies in 2012 with an estate valued at 5 million dollars, the 5 million dollar exemption amount is reduced by 1 million reflecting the 1 million dollar taxable gift to 4 million.  That means that 1 million of the 5 million dollar estate is taxable. 

 

            The foregoing information regarding federal gift, estate and generation-skipping transfer taxes applies only for the years 2011 and 2012.  If Congress does not modify the tax code before 2013, the gift, estate and generation-skipping transfer taxes revert back to their status in 2001 which included only a 1 million dollar lifetime exclusion amount.

 

            Oregon law allows each individual a 1 million dollar exemption as contrasted with the 5 million dollar personal exemption for federal estate tax purposes.  This means that any individual who has an estate exceeding 1 million dollars is vulnerable to Oregon inheritance tax even though they would be federal tax-free. 

 

            There are certain terms used in the estate tax area which may be helpful in understanding how estate and inheritance taxes work.

 

            1.  Marital Deduction.  The unlimited amount of assets that can be transferred from one spouse to another during life or at the death of the first spouse without incurring any gift or estate tax cost. 

 

            2.  Unified Credit (Exemption).  Currently, federal tax law allows each individual to pass up to 5 million dollars tax-free.  Oregon only allows 1 million dollars to pass tax free.

 

            3.  Bypass Trust (aka Credit Shelter Trust).  A trust designed not to qualify for the unlimited marital deduction.  This trust allows spouses to use their exemption amounts; in other words, 10 million dollars for federal purposes and 2 million dollars for Oregon purposes. 

 

            Historically, using the marital deduction and some form of credit shelter trust were the most common techniques for reducing or eliminating estate taxes.   

 

DISCLAIMER

            THE INFORMATION AND MATERIALS PRESENTED BY CARL F. JEPSEN AND WARREN ALLEN LLP ARE INTENDED TO BE EDUCATIONAL ONLY AND ARE NOT SPECIFIC LEGAL ADVICE.  YOU SHOULD CONSULT YOUR OWN ATTORNEY FOR ADVICE REGARDING THE APPLICATION OF THE LAW TO YOUR INDIVIDUAL CIRCUMSTANCES.

 

            Pursuant to IRS regulations, any tax advice contained in this communication (including any attachments) is not intended or written by the practitioner to be used, and cannot be used, for the purpose of avoiding tax-related penalties under the Internal Revenue Code.  The tax advice expressed above is being delivered to support the promotion or marketing of the matter or transaction discussed or referenced.  Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

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