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There is often a great deal of confusion about gift tax and estate tax – exactly how they differ and how they are alike and what role they play in estate planning. That confusion is quite understandable because tax laws of any kind are so abstruse and convoluted. So we offer the following to help you better understand these important legal matters so that, when you consult an experienced estate planning attorney in Northern VA, you can reduce your tax exposure.
Estate tax concerns the transfer of property and assets, the estate, of a deceased person to another. Federal law requires the filing of an estate tax return if the value of the “gross estate”(setting aside certain deductions) exceeds a specified dollar amount. The gross estate comprises all the assets of the decedent at the time of death – for example, stocks, real estate, cash, mortgages, insurance, and jointly owned property.
There does exist a “personal estate tax exemption.” This exemption allows some (or, in some cases, all) of the decedent’s property to transfer free of the estate tax. For example, the estate can transfer tax-free to a surviving spouse if the spouse is a US citizen. There are also certain deductions – administrative expenses, funeral expenses, and others – that can be taken against the gross estate to lower the tax.
These laws, however, are changing all the time, generally as they touch on specified dollar amounts. And that’s where the services of a qualified tax law attorney come in.
A gift tax is levied when the property of a living person transfers to another. And generally, the donor is responsible for paying the gift tax unless special arrangements are made under which the recipient agrees to pay the tax. A gift is considered any transfer for which the donor receives nothing in return or less than the fair market value of the gift. Still, the gift tax isn’t applicable until the cumulative lifetime value of the gifts and transfers at death exceeds $5 million (an amount that is adjusted for inflation each year), so only a few people wind up paying the gift tax.
In addition, some gifts are exempt from the gift tax, and these include:
If you do make a taxable gift, then you have to file a gift-tax return (IRS Form 709). Again, it all gets fairly tangled, but a good estate planning attorney in Northern Virginia can help you sort it all out.
Now, the good news is that the estate tax and gift tax are integrated or unified into one tax system and can work in sync. They both have the same basic exclusion amounts, and in some cases, they are combined and subject to a single progressive tax. In addition, your spouse is allowed a separate $5+ million deduction.
In some cases, for people with a good deal of assets, an experienced attorney may recommend making a large gift that does, in fact, require payment of the gift tax during the donor’s lifetime. The purpose here is to significantly reduce the amount of estate tax that would have to be paid later on the donor’s death. The idea is to make the combined total of the gift tax and estate tax less than what the estate alone (without the gift having been given) would have been.
At Legacy Law Group of Northern Virginia, we are specialists in estate planning, especially with respect to estate tax and gift tax. Our goal is to help you protect and preserve your assets and facilitate a smooth, effective transfer. Just call us at (703) 492-9955 or contact us using our contact form for more information.