General Concepts.

Lifetime gifts and testamentary gifts are subject to both federal and state taxation. There is an exemption amount for gifting. There are no estate or gift taxes on total transfers which are less than the exemption amount.

For many years the federal exemption amount for both estate and gift taxes was $600,000 with a maximum tax rate of 55%. The federal estate and gift tax exemption amount has increased to $5 million (indexed for inflation) and the maximum estate and gift tax rate has been lowered to 40%. Estate taxes are due within 9 months of death, and must be paid in cash out of the estate. Gift taxes must be paid by the donor at the time that the gift tax return is due, typically April 15th of the year after the gift.

The individual federal exemption amount for 2014 is $5.34 million. For 2015, the exemption amount is increased to $5.43 million.

With proper tax planning, a married couple can pass a joint estate of over $10 million without incurring a federal estate tax. As a result, many people no longer worry about estate taxes, and there is less need to do estate tax planning.

There are two types of gifts which are excluded from gift taxes.

a.        Individuals can make gifts, during 2014 and 2015, of $14,000 each to an unlimited number of persons each year. The annual exclusion amount is indexed based on inflation.

b.        There are no gift taxes on gifts for the payment of educational or medical expenses, if the gifts are paid directly to the institution. This exclusion does not apply to gifts made to individuals for their use toward such expenses.

Unlimited Marital Deduction.

There is a tremendous benefit to married couples relating to the federal estate tax. One can leave his/her spouse an unlimited amount without incurring a federal estate tax at the time of the first death. The estate tax on the spousal gift is deferred until the death of the surviving spouse. The new concept of “portability” allows the surviving spouse to combine his/her federal exemption amount with the unused federal exemption of the deceased spouse, provided an estate tax return is filed for the deceased spouse. Consequently, a married couple can pass a joint estate of $10.86 million in 2015 without incurring a federal estate tax.

If a couple have a joint estate of more than $10.86 million (or may have one in the future), estate tax planning techniques can be used to minimize the total amount of estate taxes. Both husband and wife should establish a trust on their death, which will hold the individual exemption amount and will protect those assets from any future estate taxes. Any assets over the exemption amount can go to the surviving spouse, either outright or in trust.

Generation Skipping Transfer Tax.

There is an additional federal tax on transfers which skip a generation, such as a gift from you to your grandchildren. Every generation skipping transfer is taxed at the maximum tax rate. For 2015, each person has a generation skipping exemption of $5.43 million. There is no portability for the generation skipping exemption.

Illinois Estate Tax.

In addition to the federal taxes, the State of Illinois also imposes an estate and gift tax. For many years, the Illinois estate tax did not result in any additional taxes, because there was a reduction in the federal estate tax for the amount paid to Illinois. Unfortunately, this “state tax credit” has been phased out, and the Illinois estate tax is now separate from and in addition to the federal estate tax.

The Illinois estate tax rate is graduated from 10% to 16%. To complicate things even more, the maximum exemption in Illinois is only $4.0 million (rather than the federal exemption of $5.43 million) and there is no portability. A couple with a joint estate in excess of $4.0 million must consider the effect of the Illinois estate tax on their estate planning, and may wish to take steps to limit the effect of the Illinois estate tax.