Estate and Gift Taxes
History of Federal Estate and Gift Tax Law Changes
2010 Estate and Gift Tax Law Changes: Congress made significant changes to the federal estate tax rules and rates in 2010. As a result, in 2011 and 2012 individuals, over the course of their lifetimes, could give or bequeath $5,000,000 (indexed for inflation) to anyone free of a federal transfer tax. If the combined total of lifetime gifts and death bequests exceeded $5 million, the excess was taxed at a 35% rate. A married couple could utilize a $10 million exemption under this 2010 law. This law was only in effect for 2011 and 2012. This law was supposed to “sunset” on January 1, 2013, with the result that only $1 million could be passed tax-free and any excess over $1 million would be taxed at federal rates ranging from 41% to 60%.
Another benefit of the 2010 tax law was that a couple did not automatically “waste” the $5 million tax-free amount allocated to each spouse. For example, assume a couple had a combined net worth of $10 million with $8 million of assets owned by the husband and $2 million of assets owned by the wife. Under the 2010 law, if the wife died first and left her $2 million to the children, the executor or personal representative of her estate could make an election to transfer her unused exemption of $3 million to her husband to be used at his death. If such an election was made, the husband would then be able to leave $8 million to his beneficiaries free of estate tax-free. His own $5 million exemption would be added to his deceased wife’s unused $3 million exemption.
2013 Estate and Gift Tax Law Changes: All of the rules in the 2010 tax law were scheduled to end on January 1, 2013. However, Congress passed a new law effective January 1, 2013, that kept the 2010 transfer tax provisions intact with some rate increases. This new law prevented steep increases in estate and gift taxes that were scheduled. This new law kept the exemption levels at $5 million (indexed for inflation). It also continued the portability feature that allowed transferring the unused estate tax exemption from the first estate to the second estate. However, this new Act also permanently increased the top estate and gift tax rates from 35% to 40%. All of the changes made by this new law were made effective for individuals dying and gifts made after 2012. As a result of the inflation adjustment, the original $5 million amount was increased to $5.25 million for the 2013 tax year.
In addition to their $5 million lifetime transfer tax exclusion (adjusted annually for inflation) an individual could also make gifts during their lifetime that qualified for the “annual gift tax exclusion.” The annual gift tax exclusion amount (which is also adjusted annually) was $14,000 for 2013. This meant an individual could make as many gifts of up to $14,000 per person to any number of persons in 2013 without any federal gift tax consequences and without having to file a Gift Tax Return. To qualify for an annual exclusion, the gift had to be a “no strings attached” gift. The annual exclusion was also available for gifts to pay medical and educational expenses.
2014 Estate and Gift Tax Law Changes:
- The estate and gift tax exclusion amounts were increased to $5.34 million.
- The gift tax annual exclusion for gift taxes remained at the 2013 level of $14,000.
2015 Estate and Gift Tax Law Changes:
- The estate and gift tax exclusion amounts were increased to $5.43 million.
- The gift tax annual exclusion for gift taxes remained at the 2013 level of $14,000.
2016 Estate and Gift Tax Law Changes:
- The estate and gift tax exclusion amounts were increased to $5.45 million.
- The annual exclusion for gift taxes remained at $14,000.
2017 Estate and Gift Tax Law Changes:
- The estate and gift tax exclusion amounts were increased to $5.49 million.
- The annual exclusion for gift taxes remained at $14,000.
2018 Estate and Gift Tax Law Changes:
- The estate and gift tax exclusion amounts were increased to $11,8 million.
- The annual exclusion for gift taxes was increased to $15,000.
NOTE: Although many states impose taxes on lifetime gifts or at-death transfers, Arizona does not.
