In January 2013, Congress permanently set the amount that an individual can transfer tax-free either during life or at death.  The agreement essentially extended the rules that had been in place in 2011 and 2012, with one important exception.

The law permanently set the estate tax exemption at $5 million for an individual (now $5.43 million due to inflation) and $10 million for a couple (now $10.86 million).  The lifetime gift tax exclusion – the amount you can give away without incurring a tax – is also $5.43 million.  But you can still give any number of other people $14,000 each per year without the gifts counting against the lifetime limit; see below.

The change from the previous two years is that the gift and estate tax rate will increase from 35 percent to 40 percent. This means that if you transfer more than $5.43 million either during your life or upon your death, your estate will be taxed at 40 percent.

The new estate tax rates and rules are “permanent,” but only until Congress decides to revisit them and the President agrees to the changes.  But keep in mind that the new law does not address state estate taxes, which many states have.

This said, not all estates will be taxed. First, spouses can leave any amount of property to their spouses, if the spouses are U.S. citizens, free of federal estate tax. Second, the estate tax applies only to individual estates valued at more than $5.43 million ($10.86 million for couples) in 2015 (see chart). The federal government allows you this tax credit for gifts made during your life or for your estate upon your death. Third, gifts to charities are not taxed.

The new law also continues to make the estate tax exemption “portable” between spouses. This means that if the first spouse to die does not use all of his or her $5.43 million exemption, the estate of the surviving spouse may use it. So, for example, John dies in 2015 and passes on $3 million. He has no taxable estate and his wife, Mary, can pass on $7.86 million (her own $5.43 million exclusion plus her husband’s unused $2.43 million exclusion) free of federal tax. (However, to take advantage of this Mary must make an “election” on John’s estate tax return. Check with your attorney.)

Tax Year

Tax Rate

Exemption Equivalent

2010 N/A or 35% N/A or $5,000,000



2012 35% $5,120,000









The currently high federal estate tax exemption, coupled with the portability feature, might suggest that “credit shelter trusts” (also called AB trusts) and other forms of estate tax planning are needless for other than multi-millionaires, but there are still reasons for those of more modest means to do planning, and one of the main ones is state taxes. Nearly half the states also have an estate or inheritance tax and in many cases the thresholds are far lower than the current federal one. Many states used to take advantage of what was known as a “sponge” tax, which ultimately didn’t cost your estate. The way this worked was that the states took advantage of a provision in the federal estate tax law permitting a deduction for taxes paid to the state up to certain limits. The states simply took the full amount of what you were allowed to deduct off the federal taxes. However, the allowable state deduction was phased out under the Bush tax cuts enacted in 2001, and it disappeared entirely in 2005. This means that many states are changing their estate tax laws to make up the difference, and more changes at the state level can be expected as state politicians react to the new federal estate tax landscape. This means that some estate planning methods that once resolved all estate tax issues up to a certain size estate are no longer effective at both the state and federal levels and need to be revised; check with your attorney.

Making Gifts: The $14,000 Rule

One simple way you can reduce estate taxes or shelter assets in order to achieve Medicaid eligibility is to give some or all of your estate to your children (or anyone else) during their lives in the form of gifts. Certain rules apply, however. There is no actual limit on how much you may give during your lifetime. But if you give any individual more than $14,000 (in 2015), you must file a gift tax return reporting the gift to the IRS. Also, the amount above $14,000 will be counted against a lifetime tax exclusion for gifts. This exclusion was $1 million for many years but is now $5.43 million (in 2015). Each dollar of gift above that threshold reduces the amount that can be transferred tax-free in your estate.

The $14,000 figure is an exclusion from the gift tax reporting requirement. You may give $14,000 to each of your children, their spouses, and your grandchildren (or to anyone else you choose) each year without reporting these gifts to the IRS. In addition, if you’re married, your spouse can duplicate these gifts. For example, a married couple with four children can give away up to $112,000 in 2015 with no gift tax implications. In addition, the gifts will not count as taxable income to your children (although the earnings on the gifts if they are invested will be taxed).

Charitable Gift Annuities

Another way to remove assets from an estate is to make a contribution to a charitable gift annuity, or CGA. A CGA enables you to transfer cash or marketable securities to a charitable organization or foundation in exchange for an income tax deduction and the organization’s promise to make fixed annual payments to you (and to a second beneficiary, if you choose) for life. A portion of the income will be tax-free.

article source:

CategoryLegal Advice

© 2019 MATTHEW L. MERCER | Attorney at Law

15 Franklin Street
Westerly, RI 02891
Tel: 401.315.2702
Fax: 401-315-2703


Disclaimer: The Rhode Island Supreme Court licenses all lawyers in the general practice of law, but does not license or certify any lawyer as an expert or specialist in any field of practice. This web site is designed for general information only. The information presented at this site should not be construed to be formal legal advice nor the formation of a lawyer / client relationship.