Estate & Gift Taxes

After a person’s total estate is valued, the applicable estate tax is determined, if any. Under current federal law, the first $11.2 million of an estate is not subject to federal estate tax. If federal estate tax is owed, the IRS imposes the tax at a rate of up to 40%.

In addition to the federal estate tax, some states, including Oregon and Washington, impose an additional state level estate tax, Oregon imposes an estate tax at a rate from 10-16% on estate assets which exceed $1 million. Washington, on the other hand, imposes an estate tax at a rate of 10-20% on estate assets which exceed $2.193 million.

There are a number of specific rules and regulations which govern certain estate tax situations, such as the passing of assets to a surviving spouse, a qualified tax savings trust, or to a charity. 

The IRS considers a gift to be the transfer of any value from a donor to any other individual during the donor’s lifetime. Under current federal law, every individual can gift up to $15,000 per year to an individual without having to report the gift or incur gift tax. Even if a gift is over the $15,000 limit, the gift may not need to be reported if  falls into one of a few specific exceptions, such as gifts to a spouse, charity, political organization, or gifts towards a medical and/or certain educational expenses.

If a gift is required to be reported, a gift tax return must be filed before April 15th of the year following the date of the gift. The donor can choose to either pay tax on the amount of the gift which exceeds the $15,000 exclusion, or choose to defer this tax until his or her death. It is important to remember that if a gift tax is deferred, an individual is essentially using a portion of his or her $11.2 million federal estate tax exemption. Oregon and Washington do not have a state level gift tax, so deferral of a gift tax owed does not use any of a donor’s state level estate tax exemption. As such, if a gift tax is owed but deferred until death, the amount of the taxable gift will be added back into the individual’s estate at the time of his or her death for federal estate tax purposes.

Prior to 1986, wealthy individuals could avoid taxation on their estates by leaving vast sums to their grandchildren, through a practice known as generation-skipping. An instrument called a ″life estate″ was used to pass wealth down through generations while avoiding federal estate tax on that wealth. The Tax Reform Act of 1986 eliminated this wealth transfer strategy.

Under the current tax code, generation-skipping refers to the transfer of funds to a person at least 37.5 years younger than the decedent. The recipient of such assets is usually a grandchild of the person transferring the assets, but that needn't be the case.

When you find yourself in a complicated tax situation, resulting from a loved one’s death, or need help planning for your own estate tax issues, contact Gevurtz Menashe for help. We offer extensive tax planning services to help avoid or minimize estate taxes upon death, and can help ensure an estate tax return is filed properly upon a loved one’s death.