2014 Tax Law Summary for Estate, Gift and GST Tax

Under the new American Taxpayer Relief Act (ATRA) signed into law on January 1, 2013, the following tax laws are in effect:

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.

B. Estate Tax Exclusion. The estate tax exclusion will remain at $5,000,000, indexed for inflation from 2010 to be $5,340,000 in 2014. Therefore, each individual may pass away with up to $5,340,000 (up to $10,680,000 for a married couple) without owing any death taxes.

C. Portability. Portability is a relatively new law that allows a surviving spouse to apply or “port” any unused excess estate tax exclusion from the deceased spouse’s estate to the survivor’s estate. For example, if a husband dies with $2 M in assets titled in his name, he uses up $2 M of the $5,340,000 he is entitled to have upon his death without owing taxes. Assume the surviving spouse receives an inheritance of $10 M. The surviving wife can apply her personal $5,340,000 estate tax exclusion, plus her late husband’s remaining $3,340,000 exclusion to avoid estate tax on $8,680,00 of her assets.

D. Unified Tax Exclusion. The estate, gift and generation skipping transfer taxes are unified, so if you gift away your entire exclusion amount ($5,340,000 in 2014) 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 was increased from 35% to 40% for any amounts over $5,340,000.

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 without being subject to tax on the gain. For example if a house costs $200,000 (the basis) in the year 2000 and is sold for $300,000 in 2010, there is $100,000 in gain that may be subject to capital gains tax. If a decedent dies with the same property in 2010, the value gets “stepped up” to $300,000 without taxable gain. Basis can also get a “step down” if the asset was bought for more than the amount of the full market value on day of death.