2016 Tax Updates for Estate, Gift and GST Tax

The changes for 2016 are pretty mild compared to previous years, with the annual gift tax exclusion amount remaining the same at $14,000 per person and the Applicable Exclusion Amount only increasing by $20,000 to $5,450,000 from $5,430,000 in 2015.

A. Annual Exclusion from Gift Tax. There is an annual exclusion from gift taxes of $14,000 per person. Therefore, you may give any one person $14,000 (or $28,000 if you and your spouse are giving a joint gift from each of you) without reporting it on a gift tax return.  There is no gift tax due unless you exceed your lifetime amount of reported gifts of $5,450,000.

B. Estate Tax Exclusion. The estate tax exclusion is $5,450,000 in 2016. Therefore, each individual may pass away with up to $5,450,000 (up to $10,900,000 for a married couple) without owing any federal death taxes.  Some states have lower estate tax exemptions to be aware of.  Colorado has no state estate tax.

C. Portability. Portability allows a surviving spouse to apply or “port” any unused excess estate tax exclusion from their deceased spouse’s estate to his or her own estate. For example, if a husband dies with $2 M in assets titled in his name, he uses up $2 M of the $5,450,000 he is entitled to own upon his death without owing taxes. As the surviving spouse, the wife receives a large inheritance of $10 M after husband’s death. Wife can apply her $5,450,000 estate tax exclusion, plus her late husband’s remaining $3,450,000 exclusion to avoid estate tax on $8,900,00 of the money.

D. Unified Tax Exclusion. The estate, gift and generation skipping transfer taxes are unified, so if you gift away your entire exclusion amount of $5,450,000 during your lifetime, you will not avoid estate tax on assets in excess of that amount upon you death. You will, however, get the benefit of an annual increase in the exclusion amount every year as it is adjusted for inflation.

E. Tax Rates. The estate, gift and generation skipping transfer tax rate is 40% for any amounts over $5,450,000.

F. Step Up (or Down) in Basis Upon Death. There is an unlimited step-up (or down) in income tax basis at death. A “step up in basis” upon death means all property titled in the name of the decedent will go from having a cost basis (the property’s original cost / price) or adjusted basis (such as with depreciated property) up to the full market value upon the day of death. For example if I buy a house for $200,000 in 2000 (the basis) and sell it in 2010 for $300,000, I have $100,000 in gain, possibly subject to capital gains tax. If I die with the same property in my name, the value gets “stepped up” to $300,000 without gain recognition. Basis can also get a “step down” if the asset was bought in a bubble market and full market value on day of death is less than the purchase price was.