11.03.2020

USA: New Rules For Gift And Estate Tax

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Issue

At present, the lifetime gift and estate tax exclusion is $11.18 million.

Gifts and inheritances above that amount are subject to taxation. Rates vary depending on the amount subject to taxation. The top rate is 40%. 

Recently, courts have changed from whom the IRS can collect such taxes.

Americans can get screwed if they’re not careful!

Gift and Estate Tax

Currently, the gift and estate tax has a combined lifetime exemption amount of $11.18 million.

Gifts and inheritances above that amount are subject to taxation. 

For example, let’s suppose that Amber gives $2 million dollars in gifts to her sister Jessica and has not made gifts to anyone else. This would reduce Amber’s lifetime exemption to $9.18M.

Jessica could then inherit $9.18 million from Amber without any estate taxes being owed. 

$2 million gift + $9.18 million inheritance = $11.18 million gift and estate tax threshold.

Whatever portion of your lifetime gift tax exclusion you don’t use during your lifetime becomes your estate tax exclusion. In the above example, Amber would have an estate tax exclusion upon her death of $9.18 million, assuming she gives no more gifts during her lifetime.

To further illustrate this, assume Jessica were to inherit $10.18 million. Estate taxes would be owed.

$2 million gift + 10.18 million inheritance = $12.18 million (one million above the combined gift and estate tax exemption).

Amber’s estate would be responsible for paying estate taxes on the $1 million.

What happens if Gift and Estate taxes are not paid?

If Amber’s estate fails to pay the required tax, then that obligation transfers to Jessica.

Intuitively, this makes sense as Amber is no longer alive.

Until recently, gift taxes were treated differently. The IRS would only go after the donor (ther person making the gift) while the recipient would be safe.

But a new court ruling now allows the IRS to use this strategy regarding gifts as well… even when the donor (the person making the gift) is still alive. 

Here is an example. 

Let’s suppose that Amber gifts $14.18 million to her sister Jessica (Amber has made no other gifts).

$14.18 million gift – $11.18 exemption amount = $3 million subject to taxation

Because Amber is the person making the gift that exceeds the exempted amount, she is responsible for paying the gift tax.

If Amber fails to pay, the new court ruling allows the IRS to force Jessica to pay the tax on the gift she received!

Jessica can be held responsible for the tax even if Amber is still alive!

Be Careful!

The IRS is placing the recipients of gifts in a difficult situation.

They are now forced to ask the donor if he owed and paid taxes. 

What if the donor makes a mistake?

The recipient could be the one who ends up in hot water with the IRS.

Recipients who receive cash could end up in trouble if they spend it all. They might not have the funds to pay the taxes.

Recipients who receive assets might need to sell them just to cover the tax!

Gifts should be an act of love and appreciation.

Now, recipients of gifts must be extremely cautious and plan for a potential tax bill.

Who else but the IRS could take the joy and excitement out of receiving a gift?

Need Help?

Our consultants at Esquire Group can help with estate planning and making gifts strategically.

We can also help you with properly documenting the value of gifts and inheritance you have received.

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