Estate Tax Overview
Colorado Estate Taxes – Colorado does not have an estate tax. (Some states still do.)
Federal Estate Taxes
For reasons discussed below the Federal Estate tax applies only to a few very wealthy persons. The federal estate tax is a tax levied against the “right to transfer” property at the time of death. it is an “everything tax” on the decedent’s assets minus liabilities and certain expenses. Any assets owned or controlled by the decedent at the time of death are included in his or her estate for federal estate tax purposes. Additionally, if the decedent had the “incidents of ownership” over a life insurance policy, the policy proceeds are included in the decedent’s estate tax calculation. Incidents of ownership generally include direct ownership of the policy, the right to borrow against the policy, the right to transfer the policy, surrender it or change the beneficiary(s).
The Unlimited Marital Deduction
If assets are transferred directly to a surviving U.S. citizen spouse or to a qualifying marital trust the value of those assets may qualify for the unlimited marital deduction on the return of the first spouse to die. This may only be a deferral of estate taxes because assets qualifying for the unlimited marital deduction are included in the estate of the surviving spouse.
The Applicable Exemption Amount (AEA)
The AEA is sometimes colloquially referred to as the “unified credit.” Each person has an AEA. The AEA amount is indexed and has increased significantly in recent years. For deaths occurring in 2020, under current law, the AEA is $11,580,000 per person. The AEA amount available is reduced by aggregate taxable gifts in prior years in excess of the then Annual Gift Exclusion. In 2020, the Annual Gift Exclusion is generally $15,000 per Donee for single donors and $30,000 per Donee for married Donors who agree to share their annual gift exclusion.
The current law is scheduled to sunset (revert to the prior law if the current law is not renewed) on December 31, 2025. If that occurs, the AEA may revert to an amount in the range of half of its then indexed value.
After 2012, under current law, if a decedent dies and does not use his or her full AEA the unused AEA is portable (transferrable) for us by a surviving spouse. To achieve Portability a Federal Estate Tax Return must be timely filed after the death of the first spouse.
Estate Tax Rate
The estate tax rate is currently 40%.
Generation Skipping Transfer Taxes (GSTT)
If a decedent’s assets are transferred to a person two or more generations below him or her or to a person more than 37.5 years younger than the decedent then GSTT taxes may apply. There is currently a $11,580,000 GSTT exemption available for decedents dying in 2020. This GSTT exemption may also be reduced by certain transfers during life. It may also be affected if the current law sunsets.
Estate, Gift and Generation Skipping Transfer Taxes are complex. This is not intended to be legal advice.
Knowledgeable counsel should be consulted regarding your situation.
The attorneys at Davis Schilken, PC are available to discuss Estate, Gift and Generation Skipping Transfer Taxes.