gift and estate tax and marriage (Washington state)

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
letsgobobby
Posts: 11693
Joined: Fri Sep 18, 2009 1:10 am

gift and estate tax and marriage (Washington state)

Post by letsgobobby » Mon Jul 04, 2016 3:21 pm

My parents can give me $28,000 per year free from any gift or estate tax considerations. They can give $28,000 to my wife. In contrast, when they die and leave me $56,000 my wife would get nothing.

Unless I am missing something, there is no way to gift $56,000 while they are still alive without my wife having half.

(NB: my wife and I are in great shape. This is not about our relationship but my dad's general sense of paranoia. My parents are not in danger of federal estate tax but will face state estate tax. A gift would save them zero in federal estate taxes but 19% or so in state estate taxes.)
Last edited by letsgobobby on Tue Jul 05, 2016 1:30 pm, edited 1 time in total.

Gill
Posts: 4828
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: gift and estate tax and marriage considerations

Post by Gill » Mon Jul 04, 2016 3:27 pm

Sure, they could use some of their lifetime exemption and give you over $5 million. Also, are you sure the state savings would be 19%? That seems high for most states, certainly for estates with no Federal estate tax. The only state with a rate that high is Washington with 20%.
Gill
Last edited by Gill on Mon Jul 04, 2016 3:32 pm, edited 1 time in total.

Geologist
Posts: 1196
Joined: Fri Jan 02, 2009 7:35 pm

Re: gift and estate tax and marriage considerations

Post by Geologist » Mon Jul 04, 2016 3:28 pm

Even if I knew your state, I probably wouldn't know its laws, so I can't comment on that. There is no big deal on the federal level to giving more than $28,000 to you (from both of them) per year. They just file IRS Form 709 (I'm pretty sure that's the right number) and since they aren't close to the Federal limit, it will never have any gift tax effect.

123
Posts: 3911
Joined: Fri Oct 12, 2012 3:55 pm

Re: gift and estate tax and marriage considerations

Post by 123 » Mon Jul 04, 2016 3:29 pm

If you have child(ren) they could receive gifts as well. Of course the gift would be to them and not to you.
The closest helping hand is at the end of your own arm.

Gill
Posts: 4828
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: gift and estate tax and marriage considerations

Post by Gill » Mon Jul 04, 2016 3:41 pm

You refer to your father's "sense of paranoia". You should realize many parents are reluctant to make substantial gifts to spouses of children and often for good reason.
Gill

letsgobobby
Posts: 11693
Joined: Fri Sep 18, 2009 1:10 am

Re: gift and estate tax and marriage considerations

Post by letsgobobby » Mon Jul 04, 2016 4:26 pm

Right, we live in Washington. I thought it was 19% but close enough.

He is thinking of moving here but worried about state estate taxes, especially since he didn't benefit from the great state for his previous 81 years. He has a terminal illness so moving here just to pay 20% on the amount over $4.x million doesn't appeal to him (or us - though we tell him and truly want him to live where he wants to).

The joke in my field is, just because I'm paranoid doesn't mean there's not somebody after me.

Good idea on the gifts to kids. Is there an opportunity to use 529s creatively? If he gifts to the 529s that I own, but with children as beneficiary, that is a gift to the kids, right? Not me? Our kids are minors so he is not going to gift substantial amounts into their UTMAs.

LK2012
Posts: 202
Joined: Mon Apr 30, 2012 4:42 pm

Re: gift and estate tax and marriage considerations

Post by LK2012 » Mon Jul 04, 2016 4:40 pm

If your father has a terminal illness, you probably should really consult an expert on estate planning and taxation. Gifts that are given within three (3) years of death can be considered part of the taxable estate. Somebody well-versed in the intricacies of these matters could be invaluable in your planning at this point. Best wishes to you and your dad and your family during this time.

letsgobobby
Posts: 11693
Joined: Fri Sep 18, 2009 1:10 am

Re: gift and estate tax and marriage considerations

Post by letsgobobby » Mon Jul 04, 2016 5:24 pm

I have never heard of a look back period for gifts. If true that would certainly put a damper on his plans.

Gill
Posts: 4828
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: gift and estate tax and marriage considerations

Post by Gill » Mon Jul 04, 2016 5:31 pm

The inclusion of gifts in contemplation of death was repealed many years ago.
Gill

Geologist
Posts: 1196
Joined: Fri Jan 02, 2009 7:35 pm

Re: gift and estate tax and marriage considerations

Post by Geologist » Mon Jul 04, 2016 5:42 pm

Gill wrote:The inclusion of gifts in contemplation of death was repealed many years ago.
Gill
For state estate/inheritance taxes, this may not be true. In Pennsylvania (where my mother lives), all gifts made within a year of death are included in the estate for inheritance tax purposes (or at any rate, that was true when my father died recently). What the law is for Washington, I don't know.

letsgobobby
Posts: 11693
Joined: Fri Sep 18, 2009 1:10 am

Re: gift and estate tax and marriage considerations

Post by letsgobobby » Mon Jul 04, 2016 5:49 pm

there is no gift tax in Washington, and no look back period that I can see.

http://dor.wa.gov/content/findtaxesandr ... aspx#gifts

But interestingly, gift tax paid in the 3 years prior to death is included as an asset in the decedent's estate.

What about the 529s - am I correct in thinking he can gift money to the 529s separate from the money he gifts me?

delamer
Posts: 6438
Joined: Tue Feb 08, 2011 6:13 pm

Re: gift and estate tax and marriage considerations

Post by delamer » Mon Jul 04, 2016 6:06 pm

letsgobobby wrote:there is no gift tax in Washington, and no look back period that I can see.

http://dor.wa.gov/content/findtaxesandr ... aspx#gifts

But interestingly, gift tax paid in the 3 years prior to death is included as an asset in the decedent's estate.

What about the 529s - am I correct in thinking he can gift money to the 529s separate from the money he gifts me?
Yes, he can.

But speaking of paranoia, I never understood the concern about gifting money to a minor via a UTMA. All my kids knew was that there was money set aside to pay for college. I certainly felt no obligation to tell them that legally they could get access to the UTMA funds when they were 18 and spend them however they wanted.

bsteiner
Posts: 3602
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: gift and estate tax and marriage considerations

Post by bsteiner » Mon Jul 04, 2016 6:14 pm

If their estates are too small to pay Federal estate tax, then there's nothing special about the $14,000 gift tax annual exclusion amount (other than for filing gift tax returns).

They can give away high basis assets such as cash or bonds to reduce their state estate tax. If they give away low basis assets such as highly appreciated stocks, they'll have to weigh the state estate tax savings against the loss of the basis step-up.

If their estates are large enough to pay state estate taxes given the $2,079,000 Washington State exempt amount for each of them, they may want to provide for you in a flexible trust that you control rather than outright, to keep your inheritance out of your estate for estate tax purposes, and to protect it against your creditors and spouses

afan
Posts: 3924
Joined: Sun Jul 25, 2010 4:01 pm

Re: gift and estate tax and marriage considerations

Post by afan » Mon Jul 04, 2016 6:27 pm

Bsteiner gives good advice as always. Your dad also needs to consider the tax consequences of not moving. Would there be state estate taxes where he lives now?

I am with him. I would cheerfully live out my final days alone in a no tax state, rather than move somewhere and give away 20% of my money for the privilege of dying there. Perhaps he can keep his residence in the, apparently, lower tax state and come to Washington for an extended vacation? At some points you talk about your parents, and at others about your dad. Is your dad married? If so, that would be a reason not to gift down to below the state estate tax limit now. If he is single, then he could leave himself plenty of money to live on, particularly considering what you say about his health, while taking his estate below state taxable level.

Using trusts sounds like a great idea.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

letsgobobby
Posts: 11693
Joined: Fri Sep 18, 2009 1:10 am

Re: gift and estate tax and marriage considerations

Post by letsgobobby » Mon Jul 04, 2016 7:11 pm

bruce, good advice as always - thank you. There is no reason for them to limit gifts to $14,000, because it is unlikely they will pay federal estate tax.

my parents are married but both have advanced cancer. everything is up in the air but my mom's condition looks better than dad's. Where it's tricky is that their estate is under the federal exemption now, but depending how long one of them lives it could exceed it over 5-10 years. Surprisingly, the 5 year survival rates for them are under 50%, but not in the single digits. High enough that some planning is in order.

The state they live in now, and the state where my sister lives, do not have estate taxes. They are aware that the easy answer is to move to where my sister lives. That may be the outcome.

They already are leaving the estate to my sister and I in trust, so that is a disadvantage of making gifts outright, unless somehow the gifts can be left in trust as well. Since both my sister and I are physicians, ie at somewhat high risk for lawsuit, if there were a way to have the gifts in trust we would all be more comfortable.

afan
Posts: 3924
Joined: Sun Jul 25, 2010 4:01 pm

Re: gift and estate tax and marriage considerations

Post by afan » Mon Jul 04, 2016 7:36 pm

It is certainly possible to make gifts to trusts with you and your sister as beneficiaries.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

bsteiner
Posts: 3602
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: gift and estate tax and marriage considerations

Post by bsteiner » Mon Jul 04, 2016 9:30 pm

letsgobobby wrote:... They already are leaving the estate to my sister and I in trust, so that is a disadvantage of making gifts outright, unless somehow the gifts can be left in trust as well. Since both my sister and I are physicians, ie at somewhat high risk for lawsuit, if there were a way to have the gifts in trust we would all be more comfortable.
It might not be practical for a single $14,000 or $28,000 gift, but larger gifts can and should be in trust. If estate taxes are the greater concern, the trust can be a grantor trust for income tax purposes, so that they would pay the income tax on the trust's income and gains. If income taxes are the greater concern, they may be able to set up the trust to pay its own taxes but not be taxable in any state.

Gnirk
Posts: 871
Joined: Sun Sep 09, 2012 3:11 am
Location: Western Washington

Re: gift and estate tax and marriage considerations

Post by Gnirk » Mon Jul 04, 2016 10:54 pm

Gill wrote: The only state with a rate that high is Washington with 20%.
Gill
On the advice of my mom's CPA, I, as trustee of her revocable living trust, gifted on my mom's behalf the maximum to my brother,his wife & his son and me, and my two daughters (so each family received the same amount) over the course of 8 years, plus one large gifting to my brother and me (which required a gift tax filing) in order for her estate to be less than $2 million to avoid Washington's estate tax. She was in no danger of running out of money, and was always under the Federal Estate Tax limit. Mom hated giving any more money to the government than was absolutely necessary.

letsgobobby
Posts: 11693
Joined: Fri Sep 18, 2009 1:10 am

Re: gift and estate tax and marriage considerations

Post by letsgobobby » Tue Jul 05, 2016 2:33 am

So in this case they could give me or my sister as much as they wanted, since there are no gift tax implications and no state estate tax implications. That's about as simple as it gets.

Cigarman
Posts: 293
Joined: Fri Jul 12, 2013 5:12 am

Re: gift and estate tax and marriage considerations

Post by Cigarman » Tue Jul 05, 2016 6:12 am

From IRS website:

How many annual exclusions are available?
The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $11,000 in 2002-2005, $12,000 in 2006-2008, $13,000 in 2009-2012 and $14,000 on or after January 1, 2013, the annual exclusion applies to each gift. The annual exclusion for 2014, 2015, and 2016 is $14,000.

So, it appears that you can give them that much each year.

Hence, they each gift you $14,000 now (total of $28,000) and then again on January 1 to make it $56,000. Yes, it bumps it to another tax year.

Gill
Posts: 4828
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: gift and estate tax and marriage considerations

Post by Gill » Tue Jul 05, 2016 6:53 am

Cigarman wrote:From IRS website:

How many annual exclusions are available?
The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $11,000 in 2002-2005, $12,000 in 2006-2008, $13,000 in 2009-2012 and $14,000 on or after January 1, 2013, the annual exclusion applies to each gift. The annual exclusion for 2014, 2015, and 2016 is $14,000.

So, it appears that you can give them that much each year.

Hence, they each gift you $14,000 now (total of $28,000) and then again on January 1 to make it $56,000. Yes, it bumps it to another tax year.
Have you read the entire thread? We've concluded annual exclusion gifts are irrelevant with these facts and the parents can give as much as they wish.
Gill

afan
Posts: 3924
Joined: Sun Jul 25, 2010 4:01 pm

Re: gift and estate tax and marriage considerations

Post by afan » Tue Jul 05, 2016 8:56 am

Just don't let the simplicity of an outright gift- one short IRS form to file- blind you to the advantages of using trusts. The asset protection, estate tax and GST tax opportunities will be lost if the parents make outright gifts to their kids. The planning and drafting will cost a lot more than the postage on the tax form, but the savings over the years could be huge.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

letsgobobby
Posts: 11693
Joined: Fri Sep 18, 2009 1:10 am

Re: gift and estate tax and marriage considerations

Post by letsgobobby » Tue Jul 05, 2016 1:30 pm

according to my amateur review of the internet, WA does not have portability for spouses. At the same time it is unclear to me if assets transferred from decedent to surviving spouse can pass tax-free, regardless of amount.

For example, if Dad dies with $3 million in his name (personally held and his share of community property) and leaves everything to Mom, is there state estate tax?

Now she ends up with $6 million and can gift $4 million and face neither state or federal estate tax when she dies, if I follow the logic. Yes?

Separate from all this - what is the most reliable source to determine WA state laws for residency for estate tax purposes? If they live 183 days in another state and vote in the other state, are they a WA resident for half the year? Not at all? Does buying a house locally change that? What if they leave it empty more than the year? Assume they own no other property in WA state.

bsteiner
Posts: 3602
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: gift and estate tax and marriage considerations

Post by bsteiner » Tue Jul 05, 2016 1:52 pm

letsgobobby wrote:according to my amateur review of the internet, WA does not have portability for spouses. At the same time it is unclear to me if assets transferred from decedent to surviving spouse can pass tax-free, regardless of amount.

For example, if Dad dies with $3 million in his name (personally held and his share of community property) and leaves everything to Mom, is there state estate tax?

Now she ends up with $6 million and can gift $4 million and face neither state or federal estate tax when she dies, if I follow the logic. Yes?

Separate from all this - what is the most reliable source to determine WA state laws for residency for estate tax purposes? If they live 183 days in another state and vote in the other state, are they a WA resident for half the year? Not at all? Does buying a house locally change that? What if they leave it empty more than the year? Assume they own no other property in WA state.
Very few states have portability for the state estate tax. For a long time Hawaii was the only one. I think Maryland will have it beginning in 2019.

Dad would leave the Washington State exempt amount (presently $2,079,000) in a credit shelter trust for Mom, the difference between the Washington State exempt amount and the Federal exclusion amount in a gap trust for which you would elect QTIP (marital deduction) for state but not Federal estate tax purposes, and the excess above the Federal exclusion amount to Mom either outright or in a trust for which you would elect QTIP for both Federal and state estate tax purposes. That way, in your example, only $3,921,000 will be Mom's for Washington estate tax purposes.

Unlike the income tax, the estate tax is based on domicile. Domicile is based on all of the facts and circumstances.

afan
Posts: 3924
Joined: Sun Jul 25, 2010 4:01 pm

Re: gift and estate tax and marriage considerations

Post by afan » Tue Jul 05, 2016 5:16 pm

bsteiner wrote: Unlike the income tax, the estate tax is based on domicile. Domicile is based on all of the facts and circumstances.
So how does this work for someone who spends considerable time in two states?

Say a classic couple that spends the warm months up north and the cold months down south. They own homes in both places. They pay utilities, real estate taxes, etc, in both places.

Since they are away from either place for months on end, they forward their mail to wherever they are at the time. Naturally, they would like to claim residence in the more tax favorable state.

Would it matter that they spent more time in one place than the other? Would it be where they have drivers licenses? Where they are registered to vote? What other facts would enter into it?

With large amounts of money at stake, one would like the answers to be predictable. How often do you find the high tax state claiming someone was a resident so it could collect estate tax? How much do estates spend fighting this and how often do they win?
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

Gill
Posts: 4828
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: gift and estate tax and marriage (Washington state)

Post by Gill » Tue Jul 05, 2016 5:48 pm

Yes, there certainly can be a problem dealing with aggressive states in dealing with more than one residence. Please note, bsteiner said domicile. One can have multiple residences but only one domicile. All the facts and circumstances are considered, but one is well advised to take all the steps necessary to make the state of their domicile quite clear. You don't want to be in the position of having more than one state claiming you as a resident.
Gill

User avatar
HueyLD
Posts: 6353
Joined: Mon Jan 14, 2008 10:30 am

Re: gift and estate tax and marriage considerations

Post by HueyLD » Tue Jul 05, 2016 6:19 pm

afan wrote:
bsteiner wrote: Unlike the income tax, the estate tax is based on domicile. Domicile is based on all of the facts and circumstances.
So how does this work for someone who spends considerable time in two states?

Say a classic couple that spends the warm months up north and the cold months down south. They own homes in both places. They pay utilities, real estate taxes, etc, in both places.

Since they are away from either place for months on end, they forward their mail to wherever they are at the time. Naturally, they would like to claim residence in the more tax favorable state.
Naturally and the vast majority of them know the laws of the states involved.
Would it matter that they spent more time in one place than the other? Would it be where they have drivers licenses? Where they are registered to vote? What other facts would enter into it?
The answer depends on the state laws. If you are in that situation, you should study the applicable state laws carefully. There is no way to answer your questions without knowing the states involved.

For example, state A may claim you if you spend more than six months within a year there. State B may presume your residency only after eight months. Of course there are other factors each state considers but they vary.

User avatar
Tyr0ne
Posts: 64
Joined: Thu May 10, 2012 1:35 pm

Re: gift and estate tax and marriage considerations

Post by Tyr0ne » Tue Jul 05, 2016 6:38 pm

bsteiner wrote:
Dad would leave the Washington State exempt amount (presently $2,079,000) in a credit shelter trust for Mom, the difference between the Washington State exempt amount and the Federal exclusion amount in a gap trust for which you would elect QTIP (marital deduction) for state but not Federal estate tax purposes, and the excess above the Federal exclusion amount to Mom either outright or in a trust for which you would elect QTIP for both Federal and state estate tax purposes. That way, in your example, only $3,921,000 will be Mom's for Washington estate tax purposes.

Unlike the income tax, the estate tax is based on domicile. Domicile is based on all of the facts and circumstances.
FYI, for a visualization and more detail on this setup, I have come across this before and it may be of some help (although this uses 2014 exemption amounts):

https://epcsww.org/wp-content/uploads/2 ... utline.pdf

page 12 has the setup bsteiner mentions, I think.
There are times when, at least for now, one must be content to love the questions themselves - Neil deGrasse Tyson

bsteiner
Posts: 3602
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: gift and estate tax and marriage considerations

Post by bsteiner » Wed Jul 06, 2016 1:41 pm

afan wrote:
bsteiner wrote: Unlike the income tax, the estate tax is based on domicile. Domicile is based on all of the facts and circumstances.
So how does this work for someone who spends considerable time in two states?

Say a classic couple that spends the warm months up north and the cold months down south. They own homes in both places. They pay utilities, real estate taxes, etc, in both places.

Since they are away from either place for months on end, they forward their mail to wherever they are at the time. Naturally, they would like to claim residence in the more tax favorable state.

Would it matter that they spent more time in one place than the other? Would it be where they have drivers licenses? Where they are registered to vote? What other facts would enter into it?

With large amounts of money at stake, one would like the answers to be predictable. How often do you find the high tax state claiming someone was a resident so it could collect estate tax? How much do estates spend fighting this and how often do they win?
Most of the cases are income tax cases, where, depending on the state, the higher tax state may have two arrows in its quiver, domicile and statutory residence (often number of days, though it varies from state to state).

Estate tax is based on domicile, which depends on all of the facts and circumstances. The factors you mentioned may be relevant.

It's hard to say how often it's an issue. Since taxpayers file income tax returns each year, but estate tax returns for a particular estate are only filed once, there are many more income tax cases than there are estate tax cases. However, we've had the issue of domicile arise in the estate tax context. We've also had cases where we thought the higher tax state would contest domicile but didn't.

As with anything else, the effort an estate would put into a disputed domicile case would depend on the amount involved and the perceived strength of the estate's position.

Also, as with anything else, most cases are settled.

Post Reply