2014 Tax Update: Lifetime estate and gift tax exemption increases, annual exclusion unchanged

The federal estate tax has been up, down and back again in recent years, so let’s review the current status and what it means for you: 

Effective Jan. 1, 2014, the unified lifetime gift and estate tax exemption is $5.34 million. This is the maximum amount you may give away, during your lifetime and/or at death, free of any gift or estate taxes. A married couple may double that amount. 

The annual gift tax exclusion remains the same as last year, $14,000. This means that each year, you may give as many individuals as you wish up to $14,000, free of gift tax. A married couple may double that amount. If you give one or more individuals more than this $14,000 in any given year, you must file a gift tax return, although no tax is actually due until you have given away more than $5.34 million in excess of the $14,000 annual exclusion.

Estate and gift taxes are widely misunderstood. Below I provide clarification on some of the most common grey areas:  

• A gift that is exempt from estate and gift taxes will not necessarily be exempt if you apply for Medicaid long-term care benefits. If the transfer is for less than fair market value and was made within the look-back period, you will be penalized. Do not confuse tax-exempt with Medicaid-exempt. 

• A U.S. citizen who inherits assets from a spouse will owe no estate taxes regardless of the size of the deceased spouse’s estate. Moreover, as a result of 2010 tax legislation, the survivor may use any unused portion of the deceased’s lifetime estate and gift tax exemption. This so-called portability option is not automatic, however; the survivor must file an estate tax return for the deceased spouse’s estate on a timely basis, and elect the portability option – even if the deceased spouse’s estate is not taxable. The likelihood of the survivor’s estate being sufficiently large so as to be taxable at the survivor's death is the key factor when considering whether a return should be filed. (Note: the survivor loses the deceased’s tax credit if he/she remarries, even if the portability option has been retained.) Read more about portability. 

• An estate that is not subject to federal estate taxes may still be taxable on the state level. Florida does not have a state estate tax, but other states do. For example, New Jersey taxes anything over $675,000; New York, anything over $1million. Even if your estate is not subject to federal estate taxes, you should discuss possible tax planning with our estate planning/elder law attorneys, as many aging Floridians eventually return to their home state to be closer to the support and companionship of family. 

• As we often point out, estate taxes and probate are unrelated. Any assets that are titled in the name of the deceased individual (not in a trust) that do not have a designated beneficiary or co-owner, must pass through probate court. If there is a valid will, the asset(s) will be distributed according to the will. If there is no will or trust, the asset(s) will be distributed according to Florida intestacy laws. If you wish to spare your family the rigors of probate, you must create a probate-avoidant plan, even if your estate is not taxable.