How does gift/estate tax indexation work?

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QBoy
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Joined: Sun May 05, 2013 7:09 am

How does gift/estate tax indexation work?

Post by QBoy »

The lifetime exemption for the gift/estate tax is now $10.68 million (for a couple) and is indexed to inflation. I am not sure how this works.

Suppose that, while living, a couple funds a trust for their descendants with $10.68 million and thus fully uses up their lifetime exemption. Then some years later, because of inflation and indexation, the lifetime exemption rises to, say, $12 million. Can the couple contribute another $1.32 million to the trust without paying any tax, or is the amount they used up also indexed?
sscritic
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Re: How does gift/estate tax indexation work?

Post by sscritic »

Try this. Fill out a gift tax return. Pretend you gave the limit of $3.5 million in 2009. Give a gift of $1.75 million in 2013. What do you see?

I haven't done it, but that is what I would do if I wanted an answer to your question.

P.S. Gift taxes are individual, not joint. Yes, two people can give twice what one person can give, but it is also true that four people can give four times as much as one person (think both sets of grandparents).
Topic Author
QBoy
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Re: How does gift/estate tax indexation work?

Post by QBoy »

sscritic wrote:Try this. Fill out a gift tax return. Pretend you gave the limit of $3.5 million in 2009. Give a gift of $1.75 million in 2013. What do you see?

I haven't done it, but that is what I would do if I wanted an answer to your question.

P.S. Gift taxes are individual, not joint. Yes, two people can give twice what one person can give, but it is also true that four people can give four times as much as one person (think both sets of grandparents).
Thanks for the suggestion. But I am still hoping someone knows the answer without my having to start filling out ersatz tax returns! (My quick look at the tax form suggests that inflation does allow the couple to gift more over time, unless there is something I am missing, which is entirely possible.)

On your PS: Spouses can gift split. See line 12 of this IRS form:
http://www.irs.gov/pub/irs-pdf/f709.pdf

There is also now portability of the exemption between spouses:
http://en.wikipedia.org/wiki/Estate_tax ... ortability
bsteiner
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Re: How does gift/estate tax indexation work?

Post by bsteiner »

QBoy wrote:The lifetime exemption for the gift/estate tax is now $10.68 million (for a couple) and is indexed to inflation. I am not sure how this works.

Suppose that, while living, a couple funds a trust for their descendants with $10.68 million and thus fully uses up their lifetime exemption. Then some years later, because of inflation and indexation, the lifetime exemption rises to, say, $12 million. Can the couple contribute another $1.32 million to the trust without paying any tax, or is the amount they used up also indexed?
Yes, they'll be able to use the inflation adjustment.
sscritic
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Re: How does gift/estate tax indexation work?

Post by sscritic »

QBoy wrote: On your PS: Spouses can gift split. See line 12 of this IRS form:
http://www.irs.gov/pub/irs-pdf/f709.pdf
Did you read the instructions?
Spouses may not file a joint gift tax return. Each individual is responsible for his or her own Form 709.

You must file a gift tax return to split gifts with your spouse (regardless of their amount)
...
A married couple may not file a joint gift tax return. However, if after reading the instructions below, you and your spouse agree to split your gifts, you should file both of your individual gift tax returns together (that is, in the same envelope) to help the IRS process the returns and to avoid correspondence from the IRS.
Splitting gifts has nothing to do with the husband paying his taxes on his return and the wife paying her taxes on her return. Splitting is splitting, but filing and paying is something else again.
Topic Author
QBoy
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Joined: Sun May 05, 2013 7:09 am

Re: How does gift/estate tax indexation work?

Post by QBoy »

Thank you, bsteiner. That is very helpful. I think it means that a person gets a much larger benefit from the exemption by acting early.

sscritic: Yes, there are individual returns. I did not mean to suggest otherwise. It is just that estate planning is often done as a couple, and the IRS via portability etc. has recognized that as the norm.
lhl12
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Re: How does gift/estate tax indexation work?

Post by lhl12 »

QBoy wrote:Thank you, bsteiner. That is very helpful. I think it means that a person gets a much larger benefit from the exemption by acting early.
Yes, that is one of the fundamental principles of estate planning. If you are fortunate enough to be in a position to make meaningful gifts to your intended heirs before you die, then the sooner you can start making those gifts the longer they can compound outside your estate (and in the name of your heirs-to-be.)

If you are able to make those gifts to your grandchildren instead of your children (using the generation-skipping tax exemption) then they get even more benefit (both from duration of compounding and from avoiding estate tax on the passing of assets from children to grandchildren).
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