A blog is no place to give legal or tax advice, nor is any other medium. When you ask your CPA or lawyer to advise you on taxes and they agree, then you’re getting tax advice. This warning applies to everything on this website and its noted elsewhere here, but it’s worth repeating.
So what follows is an attempt to explain the labyrinth we find ourselves in tax-wise:
Our new law brings the lifetime exclusions together again. The estate tax, generation skipping transfer tax, and gift tax have exclusions of $5,000,000 and a top bracket of 35%.
Clear as mud?
Think of these taxes as transfer taxes. When you receive a gift or bequest, it may not be taxable for you. Look at your 1040. Gifts and bequests are not usually considered income. The question is: Does the donor have to pay a tax because the transfer exceeds his lifetime exclusion? If Don (the donor) gives you, his non-spouse, $5,013,000, what are the tax consequences? Well, for him, he probably just exhausted his lifetime exclusion of $5 million and his annual exclusion of $13,000. If he had never exceeded his annual exclusion before, and he had $5 million he could transfer, he may not owe any taxes. But he should fill out and turn in Form 709 to show what he’s done to the IRS. He probably has exhausted his lifetime exclusion for estate and gift taxes. So if Don dies the next week, and his estate still has $3 million worth of assets, and he bequeaths to you, his non-spouse, that amount, now his estate probably has to pay the estate tax. The $3 million would, under this scenario, be subject to about 35% of tax, or $1,050,000. His estate is supposed to pay that tax within nine months.
So of the three transfer taxes, estate, generation skipping, and gift, only the gift tax has an annual exclusion to go with its lifetime exclusion. You can give a non-spouse a certain amount per year that is under the exclusion amount, and yes, you can give more than that, but it will have gift tax implications. See the example above.
Please note what is often called the spousal exclusion or exemption. For most US citizen spouses, there are no transfer taxes between them.