2015 Unified Credit and Annual Gift Tax Limits Raised

The IRS recently released the 2015 tax year exclusion amounts for the unified credit (or basic exclusion) and the annual gift tax exclusion.

For the 2015 tax year, the unified credit exclusion is $5.43 million per taxpayer.  The annual gift tax exclusion remains at $14,000.

The unified credit is the combination of the lifetime gift tax exclusion and estate tax exclusion.  If your lifetime gifts and taxable estate exceed $5.43 million in 2015, you will then owe up to 40% tax to the federal government.

A good overview of the implications of the unified credit and annual gift tax exclusion is here.

Updates on federal estate and gift tax issues

This post is long overdue but, as we know, there has been a lot of activity in the past few months for farmers and ranchers.  But now that we have a Farm Bill, it is time to look at what 2014 holds for federal estate and gift tax issues.

First, the annual gift tax exclusion:

We’ve previously discussed the annual gift tax exclusion.  For 2014, the annual gift tax exclusion remains $14,000.  What this means is that an individual can gift up to $14,000 per year to as many individuals as you’d like without tax implications.    In other words, you can gift up to $14,000 per year to each of your children, each of your grandchildren, or any other individual you’d like.

Second, the unified credit:

There is another gift tax issue beside the annual gift tax exclusion — for gifts over $14,000 to an individual in a year.  This is the estate and gift tax, or more commonly known as the unified credit.  For 2014, the estate and gift tax exclusion is $5.34 million.

But what does that mean?  It means an individual can gift up to $5.34 million dollars before any gift tax will be assessed.  It also means an individual can transfer $5.34 million at death before any estate tax will be assessed.  It also means that the gift tax and estate tax are unified, meaning an individual can only gift or transfer $5.34 million before the tax is assessed.  In other words, an individual can gift $2 million and transfer $3.34 million and no tax will be assessed.  Alternatively, if an individual gifts $3 million and transfers $3.34 million, tax will be assessed on $1 million ($3 million + $3.34 million – $5.34 million = $1 million).

Even if your assets and/or net worth does not approach $5.34 million (or $10.68 million if married), estate planning is well worth your time.  You will still want to consider who will inherit your assets, how you want those assets inherited (e.g. will, trust, shares of a business), and, if you have minor children, guardianship.  You will also want to consider the costs of probate versus the costs of trusts, powers of attorney and health care, and end-of-life care.

Estate planning is for everyone, not just those who may have assets that go above the federal estate and gift tax exemption of $5.34 million.  It is worth the time to consider what you need and want and then take the necessary steps to ensure those needs and wants can and will occur.

Some basics about the federal estate and gift tax

As discussed previously, the 2014 unified credit for federal estate and gift tax has been raised to $5.34 million per person.  But what does that all mean?

The unified credit is the term given to the total amount a person may exclude from federal estate and gift tax.  In other words, a person may transfer assets during their lifetime (i.e. gifts) or after (i.e. estates).  The amount a person may transfer via only gifts, only estates, or a combination of the two is the unified credit.  It is only when the credit is exceeded that federal estate and gift tax is owed.  In other words, if the combination of your gifts and estate totals $6.34 million, federal estate and gift tax will be owed on $1 million ($6.34 million minus $5.34 million 2014 unified credit).

Portability remains a possibility with spouses.  Remember that portability requires the estate of the deceased spouse to file an estate tax return, even if no tax is owed.  The estate tax return is due nine months after the death, with a six month extension permitted.

Also remember that the annual gift tax exclusion is different than the unified credit.  You can gift up to $14,000 per person without encroaching upon the unified credit.

A good article that goes over the above and a few other details is here.  If you are a Nebraska or South Dakota farmer or rancher considering business transition, feel free to contact us with any questions you may have about the federal estate and gift tax.

2014 Tax Exclusions, Exemptions Limits Released

The IRS has released the 2014 tax exclusions, exemptions, and other information.  Of interest to this audience:

  • The unified credit (estate and gift tax, or basic exclusion) is $5.34 million in 2014.  Portability remains and the spouses can transfer up to $10.68 million tax free.
  • For an estate of a decedent dying in 2014, if special use valuation under section 2032A is used, the aggregate decrease in the value of the qualified property resulting from the use of section 2032A cannot exceed $1.09 million.
  • The annual gift tax exclusion remains $14,000 in 2014.
  • The loan limit for agricultural bonds for first-time farmers (“aggie bonds”) is $509,600.

Also included in the IRS notification are the 2014 tax brackets.  You may find this information useful as you begin tax planning for 2014.  (The information is on pages 5 – 7 of the notification.)

What does it all mean?  It means that there were no substantive changes to estate and gift tax in 2014 (as of this writing) and aggie bonds are available to first-time farmers.  Later this week we’ll go into further detail about estate and gift tax issues but for now, know that an individual will not pay federal estate taxes for a taxable estate under $5.34 million (or, if married, under $10.68 million).

In the meantime, should you have any questions, you are welcome to contact us!

Gifting as business succession

Last week, the Kansas City Federal Reserve released its Fourth Quarter Agricultural Conditions Report.  The Report noted what we all intuitively knew — farmland prices keep rising and as a result, young and beginning farmers are having a difficult time acquiring land.

But there may be some ways to transfer land to young and beginning farmers who do not have the equity a more established farmer has.  One of those methods is the use of gifting.  How would that work?

First, recognize that the annual gift tax exclusion amount (for 2013) is $14,000, or if gift-splitting, $28,000 for spouses.  Thus, you may gift property with an fair market value of up to $14,000/$28,000.  You can think of gifting cash but also more broadly than that.  Property can be personal property, such as a piece of machinery or breeding livestock.  You could consider gifting crops, seed, or other inputs needed to get started.

Property could also be real property, such as a parcel of land or a residence.  You could gift various types of interest in the property, such as a leasehold.  Again, there is no reason not to think somewhat outside the box if you would like.

But property could also be intangible, such as shares of a limited liability company or S-corporation.  You may consider gift such shares but you will also want to consider the type of shares, such as voting or non-voting.

I realize that this may seem a paltry amount of property, especially in large operations.  But it is nonetheless a method to begin the transfer of the operation to the next generation.  It is also a method to slowly bring the next generation into the business, while mentoring and providing insight into the operation.

Also keep in mind that the monetary amount of the annual gift tax exclusion is indexed to inflation.  Thus, for 2012, the monetary limit was $13,000.  For 2013, it is $14,000.  The exclusion amount will continue upward.  There is no guarantee that inflation will keep apace with valuation increases in the operation but, should you run the numbers on your operation, you may be able to gift more than a nominal portion of your operation throughout the years.

As you consider business succession and transition, you are welcome to contact Legal Aid of Nebraska.  We’re happy to discuss the myriad of methods available for business succession and transition.

A brief summary of gift tax

As I am fond of saying, there are gifts and then there are gifts.  What in the world I am talking about?

I’m talking about federal gift tax laws.  There are two gift tax provisions to be aware of: the annual gift tax exclusion and the gift tax.  Today’s edition is to give you a bit of background on gift taxes; the next post will discuss how to use the gift tax to help in the business succession of your farm or ranch.

Annual Gift Tax Exclusion:

The annual gift tax exclusion permits a person to gift, in 2013, up to $14,000 to an individual.  There is no limitation on the number of individuals who may receive up to $14,000.

If you are married, you and your spouse may contribute up to $28,000 per individual.  This is known as gift-splitting.  Keep in mind that each spouse must agree to the gift and gift splitting must be specified when filing taxes.  This requires each spouse to file a Form 709.

Because this is an annual exclusion, you can make this gift every year to individuals and pay no gift tax.

Gift Tax:

If you gift more than the annual exclusion limit to an individual, you are subject to federal gift tax.  The federal gift tax is part of the unified credit with the federal estate tax.  This means you can gift, in 2013, up to $5.25 million without being subject to the gift tax.

But how does the federal estate tax come into play?  The gift tax applies to lifetime gifts and the estate tax applies to assets left at death.  Whether you gift your assets or leave them at death, the assets are taxed in the same way at the same rate.  Thus, the gift tax and the estate tax are “unified”.  This means that when you combine the value of lifetime gifts and the value of your taxable estate at death, a total of $5.25 million is excluded from tax.

Keep in mind that the above information is general and is for your information only.  It is well worth your time to discuss your specific questions with your attorney and/or tax professional.  If you have specific questions, please feel free to contact us.