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2015 Estate Tax Update

2015 Estate Tax Update

The amount that individuals may transfer by lifetime gift or at death free of federal estate tax will be increasing to $5,430,000 for 2015, up from the $5,340,000 exemption in effect for 2014.  Illinois continues to impose a separate state estate tax and its exemption remains at $4,000,000.  While the federal exemption adjusts annually for inflation, the Illinois exemption does not.   For married couples with estates in excess of $4,000,000, they should review their estate plan to make sure their plans are designed not to inadvertently trigger Illinois estate tax  upon the death of the first spouse.

One simple way you can reduce estate taxes and, in limited circumstances, shelter assets to achieve Medicaid eligibility, is through lifetime gifting. Certain rules apply, however.  There is no actual limit on how much money you can give during your lifetime, but if you give any individual more than $14,000 in 2015, you must file a gift tax return reporting the gift to the IRS and use your available exemption to offset the gift tax due.

The $14,000 figure is an annual exclusion from the gift tax reporting requirement.  You may give up to $14,000 to each of your children, their spouses, and your grandchildren (or to anyone else choose) each year without triggering any IRS reporting requirements.  In addition, if you’re married, your spouse can duplicate these gifts.  For example, a married couple with four children could gift up to $112,000 in 2015 to their children with no gift tax implications.  In addition, the gifts would not count as taxable income to their children (although any earnings on the gifts would be taxed.)

Keep in mind that payments directly to an institution for tuition or to a provider for medical expenses on someone else’s behalf are not treated as taxable gifts and do not count against the $14,000 annual exclusion.

On the charitable giving front, on December 19, 2014, President Obama signed off on Congress’s a one-year extension for charitable IRA rollovers, but the extension is only good through December 31, 2014.   IRA owners 70 ½ or older can exclude up to $100,000 a year from income if the IRA funds are paid directly to certain public charities.   Without this extension, the IRA owner would have to pay tax on the IRA funds before claiming the deduction.  While we do not know if Congress will extend that tax break on IRA rollovers to charities for 2015 or beyond or indeed make this provision permanent, for future planning, an individual over 70 ½ might considering directing that his withdrawal from his or her IRA be paid directly to a charity.  If the law is again extended, then that individual would be able to exclude the withdrawal from his or her gross income.

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