Estate Tax Planning

The Internal Revenue Code imposes payment of an estate tax on the transfer of a taxable estate. The “taxable estate” is determined after taking all allowable deductions under the Code from the “gross estate”. Gifts qualifying for the annual exclusion, which is $15,000 for calendar year 2018 (this amount will continually be adjusted for inflation in increments of $1,000), do not count for gift tax purposes. The taxable estate is taxed at marginal rates. The estate tax calculated is lessened by credits against tax, including the applicable exclusion amount.

The exclusion amount for 2018 equals $11,180,000 and will continue to be increased for inflation in multiples of $10,000. Additionally, the applicable exclusion amount is increased, in the case of a surviving spouse, by the deceased spousal unused exclusion amount. This is much like the income tax. However, the gross estate is the amassed net worth (after income tax) value of a lifetime of work; the income tax deals with only one year’s gross income from all sources. There is also a gift tax, so lifetime transfers do not avoid the estate tax. The gift and estate taxes make up a “unified” regime. This means the value of taxable lifetime gifts stack on top of the decedent’s gross estate for tax purposes, and that amount is taxed at the higher marginal brackets.