The current Federal Estate Tax Exemption has once again been raised to reflect the moderate inflation rates we are now experiencing – the Exemption for 2016 is $5,450,000, up $20,000 from the 2015 Exemption of $5,430,000. Once you exceed the exemption, the effective tax rate is 40%.


The Annual Gift Tax Exclusion (the amount one party can gift to another in any calendar year) remains at $14,000. As such, a husband and wife can make a joint gift to any individual in the amount of $28,000 in any calendar year. For example, if parents wanted to diminish their estates and have 2 children, they can gift $28,000 to each for a $56,000 diminution in their estates which will NOT come back into their estate upon either death.  If there are grandchildren, each grandchild can be treated likewise.  HINT:  If you wish to immediately maximize what can be gifted, make one gift at years end (prior to December 31st)  for Christmas or Hanukkah gifts, then gift a similar amount on January 1st thereby doubling the amount which can be gifted quickly from $28,000 in our example to $56,000 – remember the annual exclusion is based on CALENDAR years (January 1-December 31) .


PORTABILITY – most people do not have estates aggregating more than $5,450,000 so one Federal Tax Exemption covers both estates, but what if one spouse dies and the other wins a lottery or inherits a large amount from a relative which brings the surviving spouse’s estate over $5,450,000?   Any unused portion of the first spouse to die’s Federal Tax exemption may be carried over to the survivor’s estate for a potential maximum available exemption of $10,900,000 if none of the exemption was used in the first to die’s estate.

It is a good idea to file a FEDERAL ESTATE TAX return upon the death of the first spouse even if the spouse’s estate does not use the full tax exemption.  IRS Regulations state that, for portability purposes, a Federal Estate Tax Return (form 706) does NOT have to filed, but I would rather err on the side of caution and create a record by filing on the first estate.  Filing is also beneficial for purposes of the Stepped Up Basis rules which aid the surviving spouse and/or heirs in reducing their income taxes when inherited assets are sold after  death.


FAMILY DISCOUNTS –   Family held businesses come with their own particular  set of problems – especially when it comes to transferring same to the next younger generation. If the business has been successful with the parent(s) owning all or most of the controlling interests therein, the question comes – How can I make such a transfer as economically feasible as possible without incurring a large estate tax? If the parent is willing to step aside during his lifetime then the interests can be gifted or at death willed, and most favorably too,  if applicable discounts are applied against the total appraised value of the interest. Discounts are available if there is a lack of marketability of the interest being transferred or the interest is a minority one (less than 50% percent).  Discounts of 25%, 33 1/3% or even 40% or more are not unusual if properly documented by outside firms skilled in this area.

For instance, father owns $7,000,000 worth of closely held corporate stock which, if he dies unmarried, would result in a federal estate tax of  approximately $620,000.  If, however, a proper discount valuation appraisal was conducted which, due to both lack of marketability of the stock or control of the underlying entity,  shows that a fair market value for this stock on the open market would be $4,550,000 (due to a 35% valuation discount) then all shares can be transferred  with no estate tax owed by using as much of the $5,450,000 as is needed to absorb the value of $4,550,000 in our example.  Naturally the same can be made during lifetime using the annual exclusions of $14,000 per donor/donee with the excess over and above the annual exclusions absorbed by the $5,450,000 exemption.  Any unused portion of the exemption can be applied at death to other assets owned by the decedent parent.

BE AWARE  that the IRS is looking long and hard at these discount valuations and, if the federal gift tax returns or federal estate tax returns utilize any valuation discounts, it almost insures an audit will be conducted.  Both the Federal Gift Tax Return (Form 709) which must be filed once the gift exceeds the usage of the $14,000 per donee and the Federal estate Tax Return (form 706) have questions asking if any discounts were utilized in the tax computations shown in the return.  IRS is considering legislation that will eliminate the ability to utilize these discounts – so keep that in the back of your mind please.

NEW FORM REQUIRED – FORM 8971 – one of the problems beneficiaries of an estate encounter when they inherit assets from a decedent is trying to ascertain whether they have a gain or loss once they sell the inherited assets. Most often, they do not have a clue as to what the decedent’s basis was at the time of his/her death. This is particularly true with respect to the sales of inherited stock, publicly traded or closely held.

 Remember that assets such as these will receive a “stepped-up” (date of death value) basis  without any reference needed to what the decedent paid for said shares (decedent’s basis) when the decedent originally purchased them.  This “stepped-up” basis can be a tremendous income tax savings device, yet the only place this information would be found is on the Federal Estate Tax Return to which the beneficiary may not have access.  This frustrates accountants no end.  Recognizing this fact, and for clarity purposes, IRS now requires the estate tax return preparer to complete Form 8971 which along with schedule A thereof  provides this stepped-up basis information to the beneficiaries of the estate without giving them the complete federal estate tax return – all a beneficiary and their accountant needs is contained in their respective Schedule A’s.  TIP:  There is some discussion regarding whether form 8971 is required if a Federal Estate Tax return is filed showing no tax due, but my personal feeling is that, if you go through the trouble of preparing a 706, then you should complete the job by preparing the 8971.  This form 8971 is required to be distributed to both the heirs and IRS within 30 day of filing the form 706.


NEW JERSEY DEATH TAXES – those of us who reside in the Garden State are by now well aware of the fact that our death taxes (Inheritance tax and Estate Tax)  are the highest in the nation.  Strangely, I feel no degree of pride in saying that, and I’m sure you join me in this regard.  Luckily for most of us the Inheritance Tax will not lie if our estate passes to Class A Beneficiaries – spouse, children, grandchildren, parents, stepchildren – but if our estate passes to other than a spouse and the amount that does exceeds $675,000 then an estate tax will lie.The taxes can be up to 16%.  NJ is not heartless, however, for if an estate exceeds $675,000 and passes to other than a Class A beneficiary, you pay only the higher of the Inheritance tax or the Estate tax, but not both.  By proper planning through the estates of both husband and wife, $1,350,000 in assets can be shielded from taxes.  Most of us have read that the state legislature is attempting to either eliminate the estate tax in its entirety either all at once or by increasing the $675,000 exclusion year by year till it integrates with the Federal Estate Tax credit in effect at that time.  Whether we’ll see this diminution in tax shortly is anybody’s guess as this is a political football and we all know how football games go.


Such is the situation we find ourselves in mid 2016.

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