Posts tagged with "annual exclusion"

DSUE: The Deceased Spouse’s Unused Exclusion

Many individuals have no idea what the DSUE is. Well, it is a fairly simple term when you break it down. Every individual gets an exclusion amount for estate and gift taxes that is adjusted for inflation, last year is was $5,250,000. That means that on death, or during life, an individual can devise, bequeath, or gift up to that amount without generating any tax liability. (Gifts must be under the annual exclusion amount of $14,000 in order to not be subjected to a 40% tax). If you are married, you and your spouse can combine your exclusion amounts or, when one spouse passes away with some of their exclusion left, the other spouse may use that. This is called portability and the unused amount is called the deceased spouse’s unused exclusion (DSUE for short).

For example, imagine you and your spouse have used none of your exclusion amounts. Now, one spouse passes away and their estate is $2,250,000. The deceased spouse’s estate will not be subject to estate tax because they had an exclusion amount of $5,250,000 in 2013. Therefore, the spouse had $3,000,000 left after their estate was settled. If the surviving spouse, or their executor makes the election, they may use the remaining $3,000,000 from their deceased spouse’s estate in addition to their $5,250,000. This means they can exclude up to $8,250,000 from estate, gift, and generation skipping transfer tax. The DSUE is thus “portable.”

While no estate planner relies on portability (because the government can change the law at any time), it is definitely a useful tool for those with large enough estates to utilize it. In 2013, the government set forth legislation to make portability “permanent” for the foreseeable future.

For more on the DSUE and portability see this article: Lewis Saret, Estate Tax Portability – Date DSUE Amount May Be Taken Into Account, Forbes, Jan. 14, 2014.

Or, if you would like to speak with one of Maya Murphy’s experienced estate planners call 203-221-3100. The head of our estate planning division can also be reached by email at rsweeting@mayalaw.com

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What is the Gift Tax and How Does it Work?

The federal gift tax applies to gifts of property or money while the donor is living. The federal estate tax, on the other hand, applies to property conveyed to others (with the exception of a spouse) after a person’s death.

The gift tax applies only to the donor. The recipient is under no obligation to pay the gift tax, although other taxes, such as income tax, may apply. The federal estate tax affects the estate of the deceased and can reduce the amount available to heirs.

In theory, any gift is taxable, but there are several notable exceptions. For example, gifts of tuition or medical expenses that you pay directly to a medical or educational institution for someone else are not considered taxable. Gifts to a spouse who is a U.S. citizen, gifts to a qualified charitable organization, and gifts to a political organization are also not subject to the gift tax.

You are not required to file a gift tax return unless any single gift exceeds the annual gift tax exclusion for that calendar year. The exclusion amount ($14,000 in 2013) is indexed annually for inflation. A separate exclusion is applied for each recipient. In addition, gifts from spouses are treated separately; so together, each spouse can gift an amount up to the annual exclusion amount to the same person.

Gift taxes are determined by calculating the tax on all gifts made during the tax year that exceed the annual exclusion amount, and then adding that amount to all the gift taxes from gifts above the exclusion limit from previous years. This number is then applied toward an individual’s lifetime applicable exclusion amount. If the cumulative sum exceeds the lifetime exclusion, you may owe gift taxes.

The 2010 Tax Relief Act reunified the estate and gift tax exclusions at $5 million (indexed for inflation), and the American Taxpayer Relief Act of 2012 made the higher exemption amount permanent while increasing the estate and gift tax rate to 40% (up from 35% in 2012). Because of inflation, the estate and gift tax exemption is $5.25 million in 2013. This enables individuals to make lifetime gifts up to $5.25 million in 2013 before the gift tax is imposed.

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