With recent changes to the federal and state estate tax laws, the impact of estate taxes, as well as federal gift tax laws, have been greatly reduced. In fact, the impact of these laws on the vast (vast) majority of individuals is non-existent.
The federal government imposes a tax on estates with a value in excess of $5,450,000. A married couple can shelter twice that amount by simply checking a box on a filed federal estate tax return.
The federal government also imposes a gift tax on gifts in excess of $5,450,000. A married couple can make gifts of twice that amount before paying tax. There is no state gift tax.
Many people believe that they can only gift $14,000 a year without paying gift tax. The $14,000 amount is called the annual exclusion amount. The full rule is that a person can gift $5,450,000 in his lifetime without paying gift tax; in addition, he can gift $14,000 each and every year to an unlimited number of people without reducing his $5,450,000 lifetime credit against gift tax.
To give an example, Mr. Smith could gift $14,000 each and every year to every member of his family without reducing his $5,450,000 lifetime credit against gift tax. If Mr. Smith were to gift $15,000 to one family member, then his lifetime exclusion would be reduced from $5,450,000 to $5,449,000. Stated more pragmatically, unless you are worth more than $5,450,000, there is no chance whatsoever that you will ever pay gift tax no matter how much money you give away.
It is the person making the gift, not the person receiving the gift, who pays the gift tax. So, if Mr. Smith were to gift $6,000,000 to his son, his son would never pay gift tax as a result of the gift. Mr. Smith would pay gift tax on approximately $550,000, the amount by which his gift of $6,000,000 exceeds his lifetime credit against gift tax of $5,450,000.
But, once again, if you aren’t planning on giving away more than $5,450,000, then do not worry about gift tax.
The state of New Jersey imposes an estate tax. Currently, the credit against New Jersey estate tax is equivalent to $675,000. If Mr. Smith dies and his estate is worth more than $675,000, then his estate might pay New Jersey estate tax.
In January 2017, the credit against New Jersey estate tax increases to $2,000,000. In January 2018, the New Jersey estate tax is eliminated.
What does all of this mean to you? What this means is, by January 2018, unless you own assets worth more than $5,450,000 (and by the way, the credit against federal estate tax and federal gift tax increases every year) or gift more than $5,450,000, then you never have to worry about estate tax (federal or state) or gift tax ever again.
Furthermore—and what I am about to say is speculation—we just elected Donald Trump as president. Mr. Trump is known to be a very wealthy man who is very interested in having his children run his businesses. He has stated that he intends to eliminate the federal estate tax (and the concomitant federal gift tax).
Based upon these facts, I would speculate that the federal government will eliminate the federal estate and gift taxes in the near future. So, in all likelihood, by January 2018, you will not pay estate tax (federal or state) or gift tax no matter what the value of your estate is and no matter how much money you gift away.
But since most of us do not have assets worth $5,450,000 and never will, from a practical standpoint, estate tax and gift tax are already dead or soon will be.