Attorney & Mediator
Attorney & Mediator

Federal Gift and Estate Taxes – Do You Need to Worry?


In the past, the federal estate tax was levied on estates over $600,000.  Therefore, sophisticated trusts were required to preserve the full $1.2 Million exempt amount for married couples.

In 2013, Congress made the exempt amount $5 Million per person, as adjusted for inflation.  Therefore, for 2016, each of us gets to give away up to $5.45 Million before any tax is imposed.  There are no sunset provisions for this law any longer and it will continue to adjust upward as the rate of inflation increases it.

Additionally, the current law allows for spouses to combine their estate tax exemptions without the need for complex trust language in separate trusts.  When the first spouse dies, his or her estate only uses up that portion of the exemption necessary to cover the assets being given away.  When the second spouse dies, he or she not only has the benefit of the individual exempt amount, but can use the portion of the deceased spouses exemption not already used.  Therefore, if a couple died in 2016, no federal estate tax would be imposed until the estate exceeded $10.9 Million.

This use of the deceased spouse’s exempt amount is called “portability”.  In order to preserve the unused portion of the first spouse’s exemption, an estate tax return must be prepared event though no tax will be due.

While any law can change, it is unlikely that Congress will try to change this law in the near future.  While $5.45 Million is a generous amount, changing this amount downward would not simply affect the wealthy.  Without a generous exempt amount, small family owned businesses and family farms would be affected.  In the past, it was not unusual to see family businesses and farms sold because the family inheriting the business could not afford to pay the estate tax.  It is unlikely that Congress would return to that system as it would thwart

entrepreneurship, the small business and farming.

While high asset families should keep abreast of any changes in the federal gift and estate tax law, it should not be an issue to worry about.


I am often asked by clients about taxes when it comes to inheritances and gifts.  There seems to be confusion about what gets taxed, when and why.

Income taxes are imposed on the money that you earn, either through wages, or through income from your investments

Inheritance taxes or estate taxes are upon what you own and give away during your lifetime or at your death.

First, there is no income tax to the recipient of gifts or inheritances.  Just as with life insurance, the money passes to the recipient or beneficiary income tax free.

There is one exception to this rule.  When a beneficiary receives all or part of an IRA or 401K, there is income tax as the money is withdrawn.  This is not because it is an inheritance but rather because the money was never taxed in the first place.  For IRAs and 401K’s, whoever withdraws the money pays the tax.

Inheritance and gift tax is levied against the estate or the individual who makes the gift.  We are each allowed an exclusion amount of $5 Million.  Therefore, no tax will be paid on the first $5 Million that each of us gives away during lifetime or at death.

So why do we worry about the $14,000 per year limit of gifts?  In order to keep track of what we give away during our lifetimes, we must file a Gift Tax Return with the IRS.  Therefore, if you gave away $100,000 per year for 20 years, you would have gifted away $2 Million.  Thus at death, you could only give away an additional $3 Million before taxes would be imposed.

The exception to this rule is that we can gift $14,000 to each person that we chose to in any given year without filing a gift tax return.  If you made 10 gifts of $14,000 each, you would gift away $140,000 without filing a gift tax return.  If you need to give more money to an individual in a calendar year, you won’t have to pay tax on the money; however, you will have to file a Gift Tax Return.

For most of us, we don’t have to worry about exceeding the limit of taxable gifts.  It is just a matter of knowing the rules and keeping track.