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Estate Taxation

In January 2013, Congress set the amount that an individual can transfer tax-free either during life or at death at $5 million for an individual (now $5.6 million in 2018 due to inflation) and $10 million for a couple (now $11.2 million). The lifetime gift tax exclusion – the amount you can give away without incurring a tax – was also $5.6 million. But you can still give any number of other people $15,000 each per year without the gifts counting against the lifetime limit; see below.

In December 2017, Congress and the Trump administration temporarily increased these limits to $11.2 million per person, giving a married couple a combined exemption of $22.4 million. However, this increase will expire in 2025 and the exemptions will revert to the previous exemption equivalent of $5.6 million, indexed for inflation.

Married couples can double the exemption, either through planning in advance of the first of them to die, or by filing a timely estate tax return after the first spouse’s death preserving any unused exemption for the surviving spouse. There are advantages and disadvantages to planning in advance vs waiting until death, so couples with sizable estates should consult with an attorney that specializes in estate tax planning to ensure they receive maximum benefit for their planning goals.

The estate tax and gift tax rates are essentially 40 percent. This means that if you transfer more than your available exemption either during your life or upon your death, your estate will be taxed at 40 percent.

Some states have state estate taxes, but Mississippi does not.

Certainly under the current law, and even under the prior law’s exemptions, the overwhelming majority of estates will never be taxed. Additionally, spouses can leave any amount of property to their spouses, if the spouses are U.S. citizens, free of federal estate tax, so even for married individuals whose estates exceed the personal exemption, no tax should be paid on the first spouse’s death because of the unlimited marital deduction. Planning, however, is necessary to preserve this exemption if an individual wishes to control the distributions of their assets upon their spouse’s death. This is most frequently handled through a special type of marital deduction trust known as a qualified terminal interest property (QTIP) trust which permits an unlimited amount of assets to be placed in trust for the benefit of the surviving spouse, but then controls where those assets go upon that spouse’s death. While those assets contained in the trust would be taxed in that surviving spouse’s own estate, at a minimum that tax will be deferred during the remaining life of the surviving spouse, and possibly eliminated altogether if estate tax exemptions continue to increase during the over life of the surviving spouse. Second, the estate tax applies only to individual estates valued at more than $5.6 million ($11.2 million for couples) in 2018. The federal government allows you this tax credit for gifts made during your life or for your estate upon your death. Third, gifts to charities are not taxed.

The law also continues to make the estate tax exemption “portable” between spouses. This means that if the first spouse to die does not use all of his or her $5.6 million exemption, the estate of the surviving spouse may use it. So, for example, John dies after 2025 and passes on $3 million. He has no taxable

estate and his wife, Mary, can pass on $8.2 million (her own $5.6 million exclusion plus her husband’s unused $2.6 million exclusion) free of federal tax. (However, to take advantage of this Mary must make an “election” on John’s estate tax return. Check with your attorney.)

The currently high federal estate tax exemption, coupled with the portability feature, might suggest that “credit shelter trusts” (also called A/B trusts) and other forms of estate tax planning are needless for other than multi-millionaires, but there are still reasons for those of more modest means to do planning, and one of the main ones is state taxes. Many states continue to have a state estate or inheritance tax and in many cases, the thresholds are far lower than the current federal one. Many states used to take advantage of what was known as a “sponge” tax, which ultimately didn’t cost your estate. The way this worked was that the states took advantage of a provision in the federal estate tax law permitting a deduction for taxes paid to the state up to certain limits. The states simply took the full amount of what you were allowed to deduct off the federal taxes. However, the allowable state deduction was phased out under the Bush tax cuts enacted in 2001, and it disappeared entirely in 2005. This means that many states are changing their estate tax laws to make up the difference, and more changes at the state level can be expected as state politicians react to the new federal estate tax landscape. This means that some estate planning methods that once resolved all estate tax issues up to a certain size estate are no longer effective at both the state and federal levels and need to be revised; check with your attorney.

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