Get a better understanding of the federal gift and estate taxes and incorporate tax avoidance strategies in your estate plan.

1. Get a Better Understanding of the Federal Gift
and Estate Tax and Incorporate Tax Avoidance
Strategies into Your Estate Plan
GIFT AND ESTATE TAXES –
TAX AVOIDANCE ESTATE
PLANNING STRATEGIES
RICHARD B. SCHNEIDER
PORTLAND OREGON ESTATE PLANNING ATTORNEY

2. If you have worked hard, saved responsibly, and invested well throughout
the course of your lifetime you have likely accumulated a respectable
estate that you plan to pass down to family and loved ones when you die.
In order to accomplish this goal without losing a significant portion of your
estate's value to federal and/or state gift and estate taxes you will need to
incorporate tax avoidance strategies into your overall estate plan.
WHAT YOU WANT TO AVOID
In order to create an estate plan that
accomplishes your tax avoidance goal
you must first have a clear
understanding of what you are trying
to avoid. At the federal level that
would be gift and estate taxes. Some
states have a tax that essentially
mirrors the federal tax so a discussion
of the federal gift and estate tax should suffice. When you die you will
leave behind an estate that is comprised of everything you owned, or had
an ownership interest in, at the time of your death. As part of the probate
process all of your estate assets will be identified and a date of death value
ascertained for each asset. The total value of your estate is then subject to
gift and estate taxes. In recent years, the gift and estate tax rate was as
high as 55 percent; however, the American Taxpayer Relief Act of 2013, or
ATRA, permanently established the gift and estate tax rate at a maximum
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3. of 40 percent, lower than it was in recent years yet still a high enough rate
that an estate could lose a significant portion of its value as a result of a
gift and estate tax liability. Careful planning though can avoid this
unwanted result.
HOW THE LIFETIME EXEMPTION WORKS
Each taxpayer is entitled to exempt from gift and estate tax the total value
of gifts made during his or her lifetime or at death up to the “lifetime
exemption limit”. Just as the gift and estate tax rate was subject to change,
so was the lifetime exemption limit
prior to the passage of ATRA.
ATRA permanently established the
lifetime exemption limit at $5
million, adjusted yearly for
inflation. For 2013 the adjusted
lifetime exemption is $5.25 million.
Estate assets that exceed the
lifetime exemption limit that do not qualify for another exemption or
exclusion will be subject to the gift and estate tax.
The easiest way for a taxpayer to understand the often confusing rules,
exemptions, and exclusions that relate to gift and estate taxes is by way of
illustration. Let's use Anna and John as a hypothetical married couple.
Assume that John has recently died, leaving behind an estate valued at $4
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4. million. So far, John's estate would not incur gift and estate taxes because
John is entitled to exempt up to $5.25 million. John, however, made gifts
during his lifetime valued at $2.25 million. Because gifts made during your
lifetime and at death are included, John actually has a total of $6.25 million
toward his lifetime exemption limit. This leaves $1 million subject to gift
and estate taxes ($6.25 million - $5.25 million = $1 million), resulting in a
tax liability of $400,000.
WHERE DOES THE MARITAL DEDUCTION FIT IN?
The unlimited marital deduction allows a taxpayer to leave an unlimited
amount of assets to his or her spouse at the time of death free from gift
and estate taxes. On the surface, this sounds like the solution to John's tax
problem; however, it is not
that simple. John can leave his
entire estate, valued at $4
million, to Anna and avoid gift
and estate taxes for the
moment. Because John made
gifts during his lifetime valued
at $2.25 million John still has
$3 million of his lifetime
exemption available which he will not use. Though this does solve the
immediate gift and estate tax issue it may, in the long run, result in over
funding Anna’s estate. For instance, assume that Anna also owns separate
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5. assets valued at $4 million and then receives gifts from John when he dies
valued at an additional $4 million. Anna now has an estate valued at $8
million which will then incur a gift and estate tax liability upon Anna's
death. Even if Anna did not make any gifts during her lifetime she will still
have an estate that exceeds her lifetime exemption limit by $2.75 million
($8 million - $5.25 million = $2.75 million). At a tax rate of 40 percent this
means that Anna’s estate will lose $1.1 million to gift and estate taxes
($2.75 million x 0.40 = $1.1 million).
WHAT ABOUT PORTABILITY?
Clearly, losing $1.1 million to gift and estate taxes is not a desired result.
The concept of "portability" can help. The concept of portability was
introduced in recent years and was also made permanent by ATRA.
Portability allows a surviving spouse to make use of any unused portion of
the deceased spouse’s lifetime exemption limit. For John and Anna means
that Anna may combine the $3 million that John did not use of his lifetime
exemption limit with the $5.25 million that Anna is entitled to as her
lifetime exemption for a total exemption amount of $8.25 million.
Assuming that Anna's estate remains stagnant, or does not grow in the
intervening years between John's death and Anna death, this means that
Anna's estate will be able to avoid gift and estate taxes altogether. This is
accomplished by using a total lifetime exemption of $8.25 million with a
total estate value of $8 million, effectively exempting the total value of
Anna's estate from gift and estate taxes.
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6. USING THE ANNUAL EXCLUSION
Unless Anna dies shortly after John it is unlikely that her estate value will
remain stagnant. The goal of investing after all is to grow your wealth. If
Anna’s estate grows by just $1 million between John’s death and her death
her estate will again be threatened with gift and estate taxes. At that point
Anna would have an estate valued at $9 million with just $8.25 million
available in exemptions, meaning $750,000 would be subject to taxation.
Anna’s estate would then owe $300,000 in gift and estate taxes ($750,000
x 0.40 = $300,000).
Making use of the annual exclusion is something that Anna can do-and in
fact is something that John and Anna should have been doing all along- to
reduce her estate’s exposure to gift and estate taxes. The annual exclusion
is a very simple and straightforward tax avoidance strategy that a taxpayer
can incorporate into a comprehensive estate plan. The annual exclusion
allows you to make gifts of up to $14,000 to as many beneficiaries as you
wish each year. Because Anna and John are married they can make use of
"gift-splitting" to double the value of each gift. Imagine that John and Anna
had four children. Together John and Anna could gift assets valued at up to
$28,000 to each child each year free of gift and estate taxes. Moreover,
gifts made pursuant to the annual exclusion do not count toward your
lifetime exemption limit. To put all of this in perspective, John and Anna
could have transferred $1.12 million worth of assets tax-free and without
using up any of their lifetime exemption limit over the course of just 10
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7. years ($28,000 x 4 x 10 = $1.12 million). Had they done this, Anna’s
estate would not owe any gift and estate tax under the above scenario
because her estate’s value would be under the $8.25 million in exemptions
available.
As you can see, determining your estate's potential exposure to gift and
estate taxes can be complicated; however, if you have a moderate to large
estate it is best to assume that your estate could incur gift and estate
taxes. By doing so, you will be able to work with an estate planning
attorney to create a comprehensive estate plan that includes tax avoidance
as one of its primary goals.
IRS, What’s New—Estate and Gift Tax
Forbes, After the Fiscal Cliff Deal: Estate And Gift Tax Explained
Wealth Counsel, Understanding the Impact in 2012 & 2013 of Federal
Estate Tax Laws
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8. About the Author
Richard B. Schneider
Before devoting his professional efforts primarily to estate
planning, Mr. Schneider spent over fifteen years working
on Wall Street for major law firms and investment banks.
After graduating from law school, he practiced general civil
law in New York City for five years, specializing in business
transactions, financings and corporate matters. He also
represented major investment banking firms in mortgage
trading and real estate-related matters. Among his clients
were international shipping companies, commercial and
investment banks and institutional lenders, including
General Electric Capital Corporation, Salomon Brothers and
Merrill Lynch.
For the next ten years Mr. Schneider served as Senior Vice President at the investment
banking firm of Kidder, Peabody, where he managed outside legal counsel for a variety
of large financial transactions between major institutions. He played a central role in the
creation of Kidder, Peabody’s mortgage trading subsidiary and advised and executed
transactions with insurance companies, pension funds and government agencies,
including the Resolution Trust Company.
In 1996 Mr. Schneider established a residence in Portland, Oregon and began his law
practice there in 1997. He has made a long-term commitment to providing first-class
estate planning legal services to families and individuals within the Portland
metropolitan area and the surrounding SW Washington region. His motivations for
moving to the Northwest were several: the natural scenic beauty of the Northwest
landscape, the clean air and streets, the healthy, diversified economy and the overall
high quality of life. Mr. Schneider is very grateful for the warm reception he has received
from Portland/Vancouver and is pleased to have become a respected member of the
Portland/Vancouver legal and business community.
Mr. Schneider is a member of the American Academy of Estate Planning Attorneys, the
National Academy of Elder Law Attorneys, the Estate Planning Council of Portland and is
on the board of directors of the the Rental Housing Association of Greater Portland. He
is admitted to practice in Oregon, Washington and New York.
Law Offices of Richard B Schneider, LLC
www.rbsllc.com
2455 NW Marshall St, Suite 11
Portland, OR 97210
Phone: (503) 241-1215
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