Estate taxes are an important item to consider for people with sizable estates. Darra Rayndon, a member of Clark Hill PLC, Scottsdale, Arizona, is an estate planning and taxation expert. In this report, she explains the estate tax system, including generation skipping transfer taxes, in this interview.
Rayndon points out that the estate tax is tied to the rate of inflation, and the exempt amount is recalculated by the IRS every year. For 2016, the exempt amount is $5,450,000 per person. That is a $20,000 increase over last year.
Before the tax is calculated, however, there are payments that can reduce the amount of the taxable estate. Charitable contributions are deducted, as are amounts left to a surviving spouse under the marital deduction. Estate expenses—things like funeral costs, expenses of the final illness, and similar items, are deducted before calculating the taxable estate.
There are also ways to reduce an estate prior to death. One of these is making gifts. Rayndon explains that there is an annual gift tax exclusion. In 2016, that amount is $14,000 per donor per donee. In other words, someone could give $14,000 each to an unlimited number of people and pay no taxes on the gifts. In addition, “the donor can direct pay educational expenses and medical expenses . . . without there being any taxation on that transfer.”
Rayndon says that there is a generation skipping transfer tax (GST tax) that everyone should be aware of. The GST tax comes into play when a grandparent makes a gift directly to a grandchild and not to the child’s parents. A generation has been skipped, and the tax will apply unless the amount given is less than the GST tax exemption for that year. There could also possibly be a gift tax, depending on the amount of the gift. The GST tax also applies also to gifts that are part of an estate. As it happens, the amount of the GST tax exemption in 2016 is $5,450,000. Like the estate tax, it is tied to the rate of inflation. The GST tax exemption is a lifetime amount, so it is possible to use it up over the course of one’s life and trigger GST tax after death because of gifts made to grandchildren. The GST tax, like the estate tax, is 40%.
Darra L. Rayndon, a Member in Clark Hill’s Estate Planning & Probate Practice Group, has over thirty years of practice experience and is certified as a tax specialist by the Arizona Bar. Darra’s work includes tax planning, business entity formation and representation including corporations, partnerships, limited liability companies, and other businesses, estate and wealth succession planning, asset protection, exempt private offerings, and real estate matters. She is also a Certified Fiduciary through the Arizona Supreme Court, and as such, serves as trustee and in other fiduciary capacities when called upon. The Legal Broadcast Network is a featured network of Sequence Media Group.