Before we address the question that serves as the title this blog post, we must provide the necessary background information. We have a federal estate tax in the United States, and it carries a potentially devastating 40 percent maximum rate.
The good news is that most people do not have to pay this death levy, because there is a credit or exclusion that is quite high. This is the amount that can be transferred before the estate tax would become applicable. In 2020, the exclusion is $11.58 million, but it is subject to an adjustment next year to account for inflation.
We should point out the fact that the estate tax is applicable to asset transfers on any relative other than your spouse. If you are the married to an American citizen, you can use the unlimited marital deduction to transfer any amount of money to your spouse tax-free.
And speaking of spouses, the estate tax exclusion is portable. In this context, the term “portability” is used to describe the ability of a surviving spouse to use the exclusion that was allotted to their deceased spouse.
Federal Gift Tax
It would be logical to give gifts while you are living if you are going to be exposed to the estate tax. This used to be possible shortly after the estate tax was put into place in 1916. However, a gift tax was enacted in 1924, but it was repealed in 1926. In 1932, it returned for good, and it has been in place since then.
The exclusion is a unified exclusion. It applies to large lifetime gifts that you give along with the estate that will be transferred after you are gone.
In addition to the unified lifetime exclusion, there is an annual per-person exclusion. You can give up to $15,000 each year to any number of gift recipients tax-free before you would have to tap into your unified exclusion.
We should point out the fact that this $15,000 figure is subject to change, but that is the number that is in place right now.
In addition to these two exclusions, there is also an educational exemption. If you want to pay school tuition for others, you can do so without being forced to pay taxes.
It should be noted that this exclusion only applies to tuition, and it must be paid directly to the institution. However, you could use your annual gift tax exclusion to give $15,000 to the student each year to provide additional support.
Plus, if you are married, you and your spouse could combine your exclusions. As a couple, you can give as much is $30,000 to a student or anyone else for that matter.
Another gift tax exclusion allows you to pay medical bills for others in a tax-exempt manner. This exclusion would include the purchase of health insurance as a gift. Once again, the payments must be made directly to the provider.
Connecticut State Gift and Estate Taxes
Here in Connecticut, we have a state level estate tax, and the exclusion is $5.1 million. Because of this far lower exclusion, it is possible to face state estate tax exposure even if you are exempt on the federal level.
There is just one state in the union that imposes a state-level gift tax. As luck would have it, that state is Connecticut. The exclusion is $5.1 million, so the answer to the question is no, you cannot give gifts to sidestep the estate tax in Connecticut.
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Estate planning is more important than ever during the coronavirus era. In addition to a plan for transferring assets, you should also execute advance directives for health care to make your wishes known.
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Mr. Horowitz was awarded his Juris Doctor degree with honors from the University of Connecticut School of Law. While attending law school, Mr. Horowitz received the American Jurisprudence Award in Legal Ethics and the Nathan Burkan Award.
After graduation from law school, Mr. Horowitz continued his legal education at New York University School of Law where he received a Post Doctorate Law Degree in Taxation. He has also recently received a national achievement award.
Mr. Horowitz is admitted to practice before all the state courts in the State of Connecticut and the United States District Court.
Mr. Horowitz was selected for Super Lawyers in 2021.
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