When it comes to issues relating to family law and estate planning, it’s not usual to be unaware of how the system works until it’s your turn to be involved in it. And at times, particularly during an election cycle, gift and estate taxes are in the news with a lot of political arguments attached to them. But when these taxes affect you and your family, the facts are more important than the politics. So I wanted to share with you 12 facts about estate and gift taxes that you need to know when dealing with estate taxes and gift taxes. 
- Estate tax and gift tax are different. Estate tax is a tax on transfers at the time of death. Gift tax is a tax on lifetime transfers. Colorado has not had an estate tax in over a decade. Other states may have an estate tax. Under federal law, transfer taxes occur on both combined IF they total over $5.67 million in a lifetime (over $11.34 million for married couples with portability).
- Estate and gift taxes are politicized. Congress changes these taxes over the years for different political reasons, so they are moving targets.
- Donor intent is irrelevant. In determining whether something is a gift, it does NOT matter whether the person intended to give a gift. If the parameters are met or not met, it is or is not a gift regardless of the intention of the donor.
- The identity of the beneficiary is irrelevant. It does not matter who the beneficiary is in determining whether there was a gift. It is simply that the owner retains the right to change the beneficiary that counts (see No. 5 below).
- The gross estate includes more than what you own. The gross estate includes all items owned at time of death plus items included by the Internal Revenue Code (IRC) such as life insurance, life estate transfers, the power to designate a recipient, transfers with retained powers, stocks given with retained voting rights, shell family “business” arrangements set up to avoid tax, revocable transfers, reversionary interests, reciprocal trusts, joint property, joint spousal interests, powers of appointment, annuities, qualified retirement plans and pensions. What do all these things have in common? The giver retains a power to make a change. So, when you think about it, the giver is also to an extent a “keeper” (retaining incidents of ownership) and therefore the items are rightfully included in the gross estate.Gifts made in contemplation of death are also included in the gross estate. The IRS wants to discourage death bed conveyances (within 36 months of dying.) However this has been chipped away at so now it generally only applies to life insurance as a practical matter.
- There are deductions from the gross estate. Gifts to a surviving spouse are NOT included in the gross estate. Nor are LIMITED powers of appointment based on “HEMS” (health, education, maintenance, support) included in the gross estate. Funeral expenses and routine administrative expenses such as attorney fees and accounting fees can be deducted from the gross estate. Other deductions are claims against the estate, transfers to satisfy familial obligations, conservation easements and charitable gifts.
- There are exceptions to aforementioned deductions from the gross estate. QTIP (qualified terminable interest property) trusts and power of appointment trusts are NOT allowed as deductions from the gross estate. Nor are attorney fees from will contests.
- Estate tax property based on FMV and tax calculation based on the foregoing rules can be hotly disputed. An expert may be brought in for assets that are difficult to valuate. Estate attorneys may help clients advocate as to deductions and other issues related to defining the gross estate. Parties may choose an alternate valuation date such as six months after the date of death.
- The 706 filing is due nine months after the date of death. Any amount owed must be paid within this time as well. The personal representative may file an estate tax return for informational purposes even if no tax is owing.
- Portability allows spouses to share their $5.67 million transfer tax exemption. Thus the $11 million plus deductible amount for couples addressed above.
- Portability is not automatic. The 706 must be filed at the first spouse’s death. Also, portability does not shield the first spouse from problems that may happen that diminish the estate and allow the assets to be lost. A bypass trust is a good way to avoid these issues. Remember also that you must be a United States citizen to qualify for this deduction. Portability also provides no protection from the federal generation skipping transfer tax.
- Gifting early can lead to capital gains tax. Individuals may gift items such as real estate to children early on to “avoid probate.” Meanwhile, they gift something with a low basis and the children will later have to sell with a high profit. It may be bett er to gift later, incurring some probate expense but saving thousands (or more) in capital gains taxes.
If you or someone you know needs help navigating estate or gift taxes, please get in touch with Andersen Law PC. Call me directly at 720-922-3880 or email beth@andersenlawpc.com.
