Are You Subject to the Estate and/or Gift Tax?

Taxes are never fun, but when it comes to estate planning taxes are a major concern for most people. Understanding the different types of estate taxes is an important part of creating a comprehensive estate plan to distribute your assets after you are deceased. To help you understand more about the estate tax and gift taxes, which are two common types of taxes many people are subject to in estate planning, the following information provides a brief introduction as to what these taxes are and when they may come into play for you.

Estate Tax

The good news about the federal estate tax is that, according to the IRS, most simple estates do not require filing an estate tax return. This is because only estates for decedents dying in 2017 valued at $5,490,000 or more are subject to this tax. Generally, the estates exempt from this tax are adjusted for the annual rate of inflation, so the value of exempt estates can change from year to year. As a general rule, marital gifts – or those where an estate passes to a surviving spouse – are wholly exempt from the federal estate tax, which does not kick in until the estate passes down the line to a person’s heirs. For estates valued at or over the legally prescribed threshold for the federal estate tax that pass to heirs, the maximum effective tax rate is 40 percent. There are many steps involved in computing what qualifies as your taxable estate as well as deductions that may change the value of your estate which can be discussed with an experienced estate planning attorney to help you make choices about your assets that will ease the financial tax burden that could otherwise accompany the distribution of your assets.

It is important to remember that many states, including New York, have a state-level estate tax, too. In New York, the threshold for New York estate tax is currently $4,187,500 and $5,250,000 after April 1, 2017. That means that even if your estate is not subject to the federal estate tax, it may still be subject to the state-level estate tax.

Gift Tax

The federal gift tax covers a far broader range of actions. According to the IRS, the federal gift tax may apply whenever you make a gift of any property without receiving something in return or when you receive something less than the full value of the property you have given – including money. It can also apply when you allow the use of property or income from property to go to another person whether you intend for such an action to be a gift to another person or not. Even selling something at less than its full value could constitute a gift. As with the federal estate tax, there are amounts exempt from this tax and the effective tax rate can be anywhere from 18 percent to 40 percent depending on the value of the gift.

New York does not technically have a gift tax, though it is possible for certain gifts to be included in the value of your taxable estate in certain circumstances. When you have assets that are used in a way that may qualify as a gift, it is important to consult an experienced estate planning attorney to understand whether or not you may be subject to the federal gift tax. In some cases, the federal gift tax may be preferable to other potential taxes, and an estate planning attorney can provide you with ore information to help you make the best and most informed decision based on your circumstances and desires.