Estate and gift tax rules can be confusing. This article serves to provide some clarity to what can be overwhelming at best.
There is a federal gift tax and estate tax as well as a New York State estate tax. It is important to understand that estate tax and gift tax go hand in hand.
The annual federal gift tax exclusion amount ($17,000) applies to gifts made during one’s lifetime (and federal estate tax upon one’s death). Gifts more than $17,000 per recipient (donee) per year result in gift tax if and only if the estate is over the allowable federal estate tax exclusion.
Let us examine what this means. First, the 2023 federal estate tax exemption is $12.92 million per person. The federal annual gift tax exclusion amount is $17,000 per donee. That being said, it is important to note that: 1) only gifts that exceed the annual exclusion amount of $17,000 per person count against one’s federal estate, i.e., reduce one’s estate tax exclusion on death and 2) New York State does not impose a gift tax and therefore, gifts of any amount do not reduce one’s estate in New York.
So, for example, if a couple residing in New York State gifts $32,000 to their son, $32,000 to their daughter and $32,000 to their daughter in law, the gifts will not affect their estate even if the estates are over $12.92 million each. In other words, the gifts will not reduce either spouse’s federal estate tax exemption of $12.92 million. In addition, the gifts have no effect on New York estate tax because New York does not impose a gift tax.
Therefore, in practical terms, with the current estate tax exemption amount, a couple would have to gift over $12.92 million each for their respective estates to be taxed. That is, only gifts more than the federal exemption amount have an effect.
There is a way to ensure that you do not have gift tax if you are married, and your combined estates are over $12.92 million. For couples who have over $12.92 million combined, spouses can in effect combine their estate tax exemptions by taking advantage of “estate tax portability”.
In the context of federal estate tax, if the first of a couple to die does not “use up” his $12.92 million exclusion, but his wife later dies with an estate more than the exclusion, the wife can take advantage of her husband’s unused exemption amount/ “allowance”. So, for example, if husband dies with $5.9 million (below the federal estate tax exemption) and wife has $13.9 million (more than the federal estate tax exemption), she can use $1 million of her husband’s unused exemption amount, allowing her estate to avoid taxation completely.
To take advantage of portability, a surviving spouse must file Form 706 and elect portability within nine months of the date of death. It is important to consult with an attorney in such a case, so that the correct form can be submitted in a timely fashion.
Ronald A. Fatoullah, Esq. is the founder of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Stacey Meshnick, Esq. is a senior staff attorney at the firm who has chaired the firm’s Medicaid department for over 15 years. The law firm can be reached at 718-261-1700, 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also a partner with Brightside Advisors, a wealth management firm with offices in New York and Los Angeles.