In October 2020, the IRS released Rev. Proc. 2020-45, which sets forth inflation-adjusted items for 2021 or various provisions of the Internal Revenue Code. Some items of interest from an estate planning perspective are the following:
|Estate Tax Exemption (“Basic Exclusion Amount”)||$11,700,000|
|Applicable Credit Amount||$4,625,800|
|Generation-Skipping Transfer (GST) Tax Exemption||$11,700,000|
|Gift Tax Annual Exclusion||$15,000|
|Taxable Income Threshold at which Highest Rate Applies for Trusts/Estates||$13,050|
Generally speaking, the Basic Exclusion Amount (BEA) is the aggregate amount a taxpayer may transfer, during life and/or at death, to persons other than spouse or charity without incurring estate or gift tax. In certain cases, the BEA can be augmented by the Deceased Spouse Unused Exemption Amount (DSUEA); i.e., unused exemption the taxpayer “inherited” from a deceased spouse.
For purposes of completing a federal estate tax return (Form 706) or gift tax return (Form 709) the BEA is converted into a tax credit amount known as the Applicable Credit Amount. You can arrive at this number by subtracting $1.0 million from the BEA, multiplying the result by 40%, and adding $345,800.
The Generation-Skipping Transfer (GST) Tax is a tax separate from, but related to, the estate and gift taxes. It generally applies when property passes, during life or after death, to grandchildren or more remote descendants. It also applies to transfers to unrelated third parties who are more than 37.5 years younger.
The Gift Tax Annual Exclusion is the amount that a taxpayer can transfer–in the form of a present interest–to another person without making a taxable gift. It is determined per transferee. That is, the taxpayer can transfer up to $15,000 to as many people as he or she chooses without being subject to gift tax. Transfers in excess of the exclusion reduce your BEA. No tax is due on lifetime transfers until cumulative taxable gifts exceed the BEA. The annual exclusion is unchanged from 2019 and 2020.
A few reminders:
- Tennessee abolished the state gift tax in 2012.
- The Tennessee inheritance tax was repealed effective January 1, 2016.
- The BEA is scheduled to revert to $5.0 million, adjusted for inflation, in 2026.
Posted by Joel D. Roettger, JD, LLM, EPLS