Update on Estate and Gift Taxes for 2012

On IRS Publication 950

By Children’s Home Society of Florida Foundation

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The IRS recently released Publication 950, Introduction to Estate Gift Taxes. It provides a very general overview for the public, doctors and many professional financial advisors with respect to estate and gift taxes. The publication is a useful and concise description of the changes that apply in 2012.

1. Unified Credit – The unified credit on the basic exclusion for 2012 will be $1,772,800. This will exempt an estate of $5,120,000 from tax.

2. DSUE Amount – Under the principal of marital portability, the basic exclusion amount of $1,772,800 may be augmented by the unused exclusion amount of the last deceased spouse who passes away in 2011 or 2012.

3. Gift Annual Exclusion – The annual exclusion for present interest gifts for 2012 will be $13,000. The exclusion will not apply for gifts of a future interest.

4. Permitted Gifts – There are several categories of gifts that are permitted without payment of gift tax. These include an unlimited transfer for outright gifts to spouse, gifts to a qualified charitable organization, payments of tuition to an educational institution, or payments of qualified medical expenses to a hospital or other medical institution.

5. Gift Splitting – If one spouse of a married couple makes a gift to an individual, the two may file an IRS Form 709 Gift Tax Return and report one-half of the gift.

6. Gift Tax Unified Credit – The gift tax return will require determining taxable gifts and then a reduction by the unified credit. After adding up the amount of the gifts and reducing the amount by a marital deduction, charitable deductions, educational exclusions or medical exclusions, the $13,000 annual exclusion is applied first. This is a per-donor, per-donee exclusion. The remaining amount will be covered by the unified credit. If the full amount of unified credit is exceeded, then gift tax at a rate of 35% will be applicable on the excess.

7. Gift Tax Return Filing – The gift tax return is generally required if there are gifts to a non-spouse that are over the annual exclusion, a married couple are splitting gifts, there is a gift of a future interest or there is a gift to a spouse of an interest in property that will be ended by a future event.

8. Gross Estate – The gross estate generally includes all probate and non-probate assets owned at death. Life insurance payable to the estate or owned by the decedent is included. Most annuities and some property transferred within three years of death are also included.

9. Estate Deductions – On the estate tax return, the executor may deduct funeral expenses, last medical expenses, debts, the marital and charitable deduction and the state death tax deduction. The balance will be subject to the unified credit for the applicable exclusion amount. Any excess estate value over the applicable $5.12 million exclusion in 2012 may be subject to tax at 35%.

10. Filing IRS Form 706 – An estate tax return will be required if the estate exceeds the applicable exclusion amount of $5,120,000 in 2012. It also is required in order to preserve a deceased spousal unused exclusion amount. Therefore, many married couples with fairly modest estates may choose to file IRS Form 706 when the first spouse passes away.

11. Generation Skipping Transfer Tax (GSTT) – An additional transfer tax may be applicable for distributions to a person who is two or more generations below the generation of the donor. A grandchild or great-grandchild is a typical skip person for GSTT purposes. The GSTT of 35% may be applicable if a direct skip, taxable distribution or taxable termination is in excess of the applicable exclusion amount.

12. Income Taxes on an Estate – If an estate has $600 or more of gross income or a beneficiary who is a nonresident alien, then an IRS Form 1041 income tax return is required. In addition, the estate must send Schedule K-1 (Form 1041) to beneficiaries of the estate. These beneficiaries may be required to include income, deductions and credits in their personal IRS Form 1040 Tax Return.

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