Q: My 94-year-old father now lives with my eldest sister and she is also the executrex/trustee of his $1.2 million estate which is in a trust. If Congress does not move to keep the current exemption level at $5 million, will he be taxed only on the amount over $1 million or the full amount? Second question: Is there any way to reduce the amount over $1 million? Third question: Can she/he gift each of us $13,000. Without paying gift taxes? Is that $13,000 for children only or is it OK to gift another $13,000 to my spouse? Please help. Thank you. -- Sherry, Rancho Murieta
A: Current law provides for a credit against estate and gift taxes equating to $5 million of taxable estate. If the credit decreases to the equivalent of, say, $1 million, only the taxable estate in excess of $1 million would be subject to tax, in effect. Taxable estate is the fair market value of the taxpayer's assets less allowable deductions, including debts and expenses of administering the estate. The way the calculation works, assuming a taxable estate of $1.2 million, the tax would be calculated on $1.2 million, and then reduced by the credit, leaving the net tax due.
There are a number of ways that a taxpayer can reduce their taxable estate. The most direct is through gifting. Under the current gift tax rules, there is a $13,000 gift exclusion per donee per year. In other words, a donor can give $13,000 each to any number of donees without making a taxable gift. If a donor makes a gift to any one donee in excess of $13,000, they start using their unified estate and gift tax credit and must file a gift tax return, IRS Form 709, to report the gift. As mentioned above, the current credit equates to $5 million of taxable gifts.
Under some circumstances, gifts can be includable in a decedent's taxable estate, such as certain gifts made within 3 years of death. Before considering large gifts, it may be best to talk to an estate planning professional.
Beyond gifting, other methods exist to reduce the value of assets in an estate. Most involve planning techniques that require sound advice from estate planning professionals. If your father wants to look into more advanced strategies, I suggest meeting with an attorney that specializes in estate planning.