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For example, imagine you die this year and your $12.06 million exemption is not needed
If you give a gift worth more than $16,000 to one person in a given year , you DO have to file a Gift Tax return. However, you may NOT have to pay the Gift Tax. Instead, the amount you have gifted, in excess of $16,000, will be subtracted from your Lifetime Gift Tax exclusion, the amount of which is currently the same as the Federal Estate Tax exemption. Currently, the exemption is $12.06 million, but this amount changes every year. So, when do you have to pay the gift tax? If the total gifts given to one person in a given year exceed your Lifetime Gift Tax exclusion for that year, you have to file a Gift Tax return AND pay a gift tax.
and not used. And let’s pretend next year, the exemption amount is lowered to $3 million. Your spouse can file the Portability election to take your exemption and combine it with theirs for a total exemption amount of $15.06 million. Depending on the size of the estate, the remaining spouse has between nine months and five years from the date of the late spouse’s death to file a portability claim. The Property Tax A Property Tax is a tax on real property based on that property’s assessed value. This tax can change when you pass away and your property transfers to your heirs. Obviously, the goal is to avoid the property from being reassessed. This is important because a reassessment based on current market values could dramatically increase the Property Taxes. In California, your property does NOT need to be reassessed if 1) it was your personal residence, 2) your child moves in and makes it their personal residence within one year, and 3) the property has a market value less than or equal to “the current assessed value plus $1 million.” If the property does not meet one of the first two criteria, the property will be reassessed. If it does not meet the third criterion, only the amount exceeding “the current assessed value plus $1 million” will be reassessed. By the way, obtaining an appraisal to establish a new basis for capital gains purposes (see the Capital Gains Tax section on Page 1) has absolutely nothing to do with triggering a reassessment for Property Tax purposes. There you have it — that was “John Preston’s Guide to Everything You Didn’t Want to Know About Taxes.” I hope you learned a few things! If you were already a tax expert and knew all of this, consider passing the guide on to someone in your life who is less adept at finances. Perhaps your children, a sibling, or a friend could benefit from reading it. If you would like extra copies to share, let us know.
Regardless of the amount of the gift, the recipient has no tax consequences whatsoever. The gift is a tax-free event for the recipient.
There are four primary exceptions to these rules: any gift to a spouse, a gift to a charity, funds used to pay for another person’s medical expenses, or funds used to pay for a student’s tuition are not subject to the gift tax rules. One word of caution: When you gift an asset that has appreciated in value, the recipient will receive your basis. Gifts do not receive a step up in basis. The Federal Estate Tax The Federal Estate Tax is a 40% tax on the assets in your estate when you die. However, it doesn’t kick in until your assets exceed the allowable exemption in the year that you die. Currently, the exemption amount is $12.06 million. Unfortunately, this amount changes every year. So, by way of example, if a person dies this year, there will be a Federal Estate Tax equal to 40% on any amounts in excess of $12.06 million. There are two exceptions to this rule: assets left to charity and assets left to your spouse are not subject to the Federal Estate Tax. Portability Since 2010, spouses have had a special estate planning option called “Portability.” Under this law, if one spouse dies without using their Federal Estate Tax exemption, the remaining spouse can choose to use portability to claim the amount of their exemption. This is also called the deceased spousal unused exclusion, or DSUE. This is a great tool to use if a spouse passes when the Federal Estate Tax exemption is not needed and represents a large number. Many families whose spouse passed away this year have filed the Portability election, preserving the $12.06 million exemption for future use when the exemption may not be as high.
All the best,
–John Preston
2 PrestonEstatePlanning.com
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