The Strategic Role of Life Insurance in Estate Planning

Estate planning is an essential financial strategy that ensures your assets are managed and transferred according to your wishes after your passing. While estate planning often involves wills, trusts, and tax planning, life insurance is a pivotal component that can enhance the effectiveness of these efforts.

Liquidity When It's Most Needed

One of the primary benefits of incorporating life insurance into estate planning is the provision of liquidity. Upon the death of an estate holder, there are immediate expenses to be met, including funeral costs, outstanding debts, and perhaps taxes. Life insurance policies can be designed to pay out quickly upon the insured’s death, providing the necessary funds to cover these expenses without the need to hastily liquidate other assets, which might otherwise be sold at an inopportune time or at a loss, or may have other sentimental value (e.g., a house that has been in the bloodline for generations).

Providing for Heirs

Life insurance can ensure that heirs receive a significant cash inheritance without any delay. This is particularly beneficial for those who wish to provide for their loved ones immediately after their passing. Moreover, life insurance payouts are generally tax-free, which means beneficiaries receive the full amount of the intended gift without the deductions associated with other types of inheritances.

Equalizing Inheritances

In situations where the assets are difficult to divide equally, such as in businesses or real estate, life insurance can be used to equalize inheritances among multiple beneficiaries. For instance, if one child inherits a family business, a life insurance policy can provide comparable value to other children, ensuring fair and equitable distribution of the estate.

Estate Taxes and Other Costs

For larger estates, federal estate taxes can pose a significant burden. Life insurance can be a strategic tool to pay these taxes without the need to liquidate other estate assets. By setting up an irrevocable life insurance trust (ILIT), the proceeds from the life insurance policy can be excluded from the taxable estate, potentially saving a significant amount in taxes and preserving more of the estate for the beneficiaries.

Business Succession Planning

For business owners, life insurance is a key element in succession planning. It can provide the funds necessary for a partner or group of employees to buy out the deceased owner’s interest in the company, facilitating a smooth transition and ensuring the business’s continuity.

Life insurance offers a versatile and powerful tool for estate planning. Its ability to provide immediate liquidity, equalize inheritances, cover estate taxes, and facilitate business succession planning makes it indispensable in a well-rounded estate strategy. As with any financial planning, it's important to consult with legal and financial advisors to tailor life insurance coverage to your specific needs and goals, ensuring that your legacy is preserved and protected according to your wishes. Through careful planning and strategic use of life insurance, you can secure peace of mind for yourself and your heirs.

Integrating Charitable Giving into Your Estate Planning

Charitable giving is a noble way to ensure your legacy lives on, impacting future generations and supporting causes close to your heart. When structuring your estate plan, there are several philanthropic vehicles to consider, each offering unique benefits and considerations. From bequests to sophisticated trusts and donor-advised funds, understanding these options can help tailor your charitable contributions to align with both your financial and altruistic goals. Here's how you can effectively incorporate charitable giving into your estate planning.

Key Charitable Vehicles in Estate Planning

1. Bequests: One of the simplest ways to make a charitable gift is through a bequest contained within your living trust. This method allows you to specify an amount of money, a percentage of your estate, or specific assets to be given to charity. Bequests are highly flexible, easy to arrange, and can significantly reduce the estate tax burden on your heirs.

2. Charitable Trusts: These are more complex instruments that provide valuable tax breaks and can be tailored to suit different goals:

• Charitable Remainder Trusts (CRTs) allow you to receive an income stream or allow your designated beneficiaries to receive an income stream for a period, after which the remaining assets go to your chosen charity.

• Charitable Lead Trusts (CLTs) provide an income stream to the charity for a set term, and thereafter, the remaining assets revert to you or pass to your heirs, potentially reducing or eliminating gift and estate taxes.

3. Donor-Advised Funds (DAFs): DAFs act as a charitable investment account. You contribute assets which immediately qualify for a tax deduction, and then recommend grants to charities over time. This vehicle is particularly useful for those who wish to remain actively involved in philanthropy without managing a private foundation.

4. Private Foundations: For those with substantial assets, starting a private foundation can be an effective but complex way to control charitable giving. Foundations can fund various charities, offer family members roles in its administration, and create a lasting institutional legacy. However, they require significant management and adhere to strict regulations.

5. Endowments: Setting up an endowment can provide a charity with a permanent source of income, as the principal is kept intact while investment income is used for charitable purposes. This option is appealing if you want to ensure long-term financial support for a charity.

Strategic Considerations for Charitable Giving

Tax Implications: Each vehicle has specific tax benefits and implications. For example, bequests can reduce the size of your taxable estate, while contributions to CRTs and CLTs may reduce both income and gift taxes. Understanding these nuances is crucial in maximizing the tax efficiency of your charitable efforts.

Timing of Impact: Some options, like direct bequests or contributions to DAFs, can provide immediate benefits to charities. Others, such as endowments or CLTs, are structured to give over a long period. Consider when you want your chosen charity to benefit from your gift.

Control and Legacy: Decide how much ongoing control or involvement you wish to have. DAFs and private foundations allow for continued involvement in donation decisions, whereas bequests and endowments are generally one-time arrangements.

Family Involvement: If involving family in philanthropy is important, consider vehicles that support this goal. DAFs and private foundations can engage multiple generations in charitable activities.

Charitable giving within estate planning is not just a way to reduce taxes—it's a strategy to make a meaningful difference in the world while honoring your values. Whether it’s supporting a local community, contributing to global causes, or advancing scientific research, the right charitable vehicles can integrate your philanthropic objectives seamlessly into your overall estate plan. As always, consulting with legal and financial professionals can provide guidance tailored to your personal circumstances, ensuring your charitable contributions are both impactful and aligned with your estate planning goals.

Explainer: the Estate and Gift Tax

The Estate and Gift Tax is a tax scheme that imposes a tax on the transfer of an asset. The Estate Tax (otherwise known as the Death Tax; they’re the same thing) requires the transfer to be made after the giver’s death. So, think of an inheritance when you think of the Estate Tax. And the Gift Tax requires the transfer to be completed during the giver’s life. So, think of a birthday or anniversary gift. But in both scenarios, something is being transferred. Also keep in mind that the transfer is being made gratuitously, meaning there is no sale taking place. It must be a gift.

The Estate and Gift Tax is a tax on the grantor of the transfer. That’s the person or estate of a person that is making the gift (the giver). The tax is imposed by the Internal Revenue Service (IRS), our federal taxing authority. Note that we do not have a federal inheritance tax–a tax on the recipient of a transfer. There are a few states that do have an inheritance tax, but California is not one of them. An inheritance tax may apply if the recipient of a gift resides in a state or country that imposes an inheritance tax.

The Estate and Gift Tax is really easy to calculate. It’s a flat tax, meaning that it applies equally to every grantor of a transfer. The federal government imposes a flat 40% tax of the fair market value of the asset being transferred. That is not a typo. As an example, if I gave my friend $1,000 for her birthday, I would have to pay $400 to the IRS for making this gift. It’s an identical result if I left my friend a $1,000 inheritance from my estate. My estate would be on the hook for a $400 tax.

Hold up. Why have we not heard of anyone paying this tax?? And why is no one upset with this??

Enter: the estate and gift tax exemption.

The Estate and Gift tax are linked by an exemption amount. An exemption is a magic number that Congress selects, and it applies to every US citizen and green card holder. Congress has decided that so long as you do not make gifts in excess of your exemption amount, then no tax is owed. The exemption amount is set periodically by Congress, and it gets adjusted for inflation annually. When someone dies, all of the gifts they made during their life are added to the value of stuff they own upon their death, and that total is measured against the exemption amount.

Ok, simple enough. How do we know our applicable exemption amount?

The current exemption amount is set at $10,000,000 per person. That’s not a typo, either.  It’s indexed for inflation annually. So for 2023, the exemption amount is $12,920,000. Additionally, if you’re married, you essentially get to combine your exemption amount with your spouse’s exemption amount. In short, if you are an unmarried person, you can transfer up to $12,920,000 in assets and pay no estate taxes. If you’re married, you can jointly transfer up to $25,840,000 in assets and pay no estate taxes. Only the amount that exceeds the exemption is subject to the 40% tax. For example, if an unmarried person dies owning $14,000,000 in assets, only $1,080,000 ($14,000,000 - $12,920,000) is subject to the 40% flat tax, or $432,000 in taxes owed on a $14,000,000 estate.

How does the IRS know whether lifetime gifts were made, and how much they amounted to?

Just like we are required to report our income every year on a Form 1040, we are also required to report any gifts made in a given year on a Form 709. When you report the gift, the IRS walks over to your file and deducts the amount of that gift from your $12,920,000 exemption amount. No taxes are owed until you run out of exemption! But here’s the thing: you only have to report gifts that are in excess of what is called the annual exclusion. 

The annual exclusion is another number set by Congress that allows each person to make a certain value of gifts every year, to every recipient, and not tell a soul, including the IRS. The current annual exclusion is set to $17,000. So, for example, I can give each one of my friends up to $17,000, per year, and not have to report that on a Form 709. I can combine my exclusion with my spouse’s exclusion, and make up to $34,000 in gifts per recipient, per year, and not report it on a Form 709. This is why you never hear of anyone filing gift tax returns after birthday parties. If only we were all so generous!

So what happens if, for example, parents assist a child with a downpayment of a home, in excess of $34,000 in a given year?

If a gift is made in excess of the annual exclusion, then you deduct the amount excluded and then file a gift tax return for the amount in excess. Let’s say parents give a $200,000 gift to a child to purchase a home. They would deduct the $34,000 ($17,000 x 2 parents = $34,000) they can jointly give to the child in a year and not report it, then report the remaining $166,000 ($200,000 - $34,000). Each parent would file a Form 709 declaring a gift of $83,000 each. The IRS walks over to each parent’s file, and deducts $83,000 from each of their $12,920,000 exemption. If they haven’t gone over the exemption amount, no taxes owed on that transfer.

Whew! That’s a lot of information to digest.

To sum it up, we all get an Estate and Gift Tax Exemption. It’s set by Congress, and annually it gets adjusted for inflation. This year’s amount is set at $12,920,000. Spouses can effectively combine that amount. The tax is a flat 40% tax of the fair market value of the transferred asset, and only the giver of the gift/inheritance is on the hook. But the giver only pays it when they exhaust the exemption amount, and only the amount in excess of the exemption is taxed. Additionally, only lifetime gifts in excess of the annual exclusion (currently $17,000 per year, per recipient) count against the exemption amount. If you never exceed the exemption amount, you don’t pay any tax.

That all being said, the exemption amount is set to reduce in roughly half (to ~$6,000,000 per person) on January 1, 2026, unless Congress acts. Keep your eyes peeled for the coming months and elections to see where the exemption amount lands.

Full Video of the January Living Trust Seminar

The seminar below was presented live on January 21, 2023, by Matt Shafae, at the reSolve Group offices in Palo Alto. We covered basic estate planning, how to review an existing estate plan, how to care for minor children, and a basic survey of the taxes involved in an estate plan.

The screen may be hard to view on the video. Click here for a copy of the slides to follow along.

Revising Your Estate Plan

Many times when people create an estate plan, it is one thing on the proverbial “to do” list that might get put off longer than we want. But it feels great when we finally get it  checked off as DONE! And while that should definitely be the case, you should also review -- and revise -- your estate plan periodically. 

We’re in an extraordinary time with COVID19 dictating how we are living our lives in a way that we did not expect. In a world not too long ago, we imagined relying on people making financial or medical decisions for us who did not live near us. We have adequate virtual and digital resources to do things online; and if not, travel was available and relatively easy. This is a different world. 

There are several circumstances that arise that may require revision of your plan: 

The People

• Are the people who you designated to manage your money still the right fit for you? Are they healthy enough to take on that burden? (Remember: financial management comes up during incapacitation as well as at the time of death.) 

• Are you still happy with the list of people who you selected to make healthcare decisions on your behalf? Are they nearby enough to talk to your doctor on short notice? 

• If you have children, are the guardians that you nominated still appropriate? 

• Are the beneficiaries “right”? If you didn’t create an estate plan or a trust with us, does your plan account for your children who have been born/adopted since the plan was created? Or, perhaps your children are married with their own children now. Do you have any issues with the partner that your child chose for them self? Do you want to provide for your grandchildren directly?

The Structure

There are several ways to design an estate plan and big decisions that are made as part of the planning process.

• Did you select a survivor’s trust, but now believe an AB trust might be more appropriate?

• Did you want everything to go to your children outright but now want it to stay in trust for them?

• Did you decide that your children are (more or less) responsible and should be able to receive any potential inheritance sooner or later? 

Your Assets

Right now, the estate tax exemption amount is $11.58 million per person, or $23.16 million per married couple. In 2026, that law is set to sunset if Congress doesn’t act, and the exemption amount will drop to somewhere between $10-12 million. If your assets are starting to approach those exemption amounts, you may want to consider different estate planning tactics. 

Changes in the Law

The laws change and how it can impact your estate plan can change too. For example, have you heard of the Secure Act? It went into effect on January 1, 2020. You can read more about it here. 

Take Action

Just as critical, perhaps you are the potential beneficiary in this scenario. Did your parents create an estate plan a long time ago when you were a child, but it can now be revised to reflect better your current living situation?  There is no better time than now to have this conversation with your parents.

If you already have an estate plan, we recommend that you review it every 2-3 years to make sure that it’s still what you want—and to account for any of the above changes. If you’d like us to conduct a review of your estate plan, whether you created it with us or with someone else, please contact us for a complimentary review. 

What is... an ILIT?

This is part of an on-going series of blog posts titled the "What Is..." series, where we attempt to explain, in simple terms, common estate planning terms and concepts. To read other posts in this series, click here.

An ILIT (eye-lit) is an irrevocable life insurance trust. It’s a trust that cannot be changed (irrevocable) that is created to be both the owner and the beneficiary of a life insurance policy. Why would you do this? It’s a way of having life insurance proceeds excluded from a taxable estate. 

Remember that estate taxes are calculated by adding up the value of everything you own at your death, and if it’s over the estate tax exemption, your estate owes 40% of the excess over the exemption amount. Well, “everything you own at death” includes the proceeds of any life insurance policies you owned during life. Essentially, an ILIT allows you to gift the money “out” of your estate during your life, but still have control over the proceeds after you die.

If you’re thinking “what about gift taxes?” you’re on track: The trustee of the ILIT sends a letter to the ILIT’s beneficiaries (called a “Crummey” letter) every time you transfer money into the ILIT to pay for the insurance premiums. It advises the ILIT’s beneficiaries that they can ask for their share of the money within a specified period of time. 

Typically, no one actually asks for their share because the benefits of leaving it in the trust to pay life insurance premiums would result in more money, later. If there’s no money to pay the premium, then the policy will lapse and there won’t be anything for the beneficiary later. By issuing this letter, the money you transfer to the trustee of the ILIT becomes a “present interest” gift. In other words, that letter transforms your transfer of premium money into the trust into a lifetime gift that can be eligible for the gift tax annual exclusion. The annual exclusion allows you to make gifts up to $15,000 per year per person and not result in any gift taxes owed.

There are certain rules: 

1. You can’t be the trustee of the ILIT

2. Because it’s irrevocable, you fund it and you walk away. The trustee is in control of it. 

3. When the insured person dies, the trustee invests the insurance proceeds and administers the trust for the beneficiaries of the trust. 

The ILIT trustee possesses all incidents of ownership in the policy, so the ILIT can provide the insured’s estate with liquidity, while shielding the insurance proceeds or assets bought with the proceeds from estate tax when the insured dies. 

Flipped the other way: if you own the policy and retain control, you can withdraw cash or change beneficiaries as much as you want during your lifetime. This makes it YOUR asset. This also means that the IRS would include the proceeds of your policy in your estate’s value when you die. 

For example: the current exemption amount for an individual is $11.58 million . If you have $10 million in assets, and a $2 million life insurance policy that you control and maintain, then you have $12 million of taxable assets — over the current exemption amount. If, however, the $2 million insurance policy is in an ILIT, then it’s not part of your taxable assets, and you can (assuming it’s done correctly) stay below the exemption amount, and in this case avoid owing estate taxes.

An ILIT can either be funded with an existing life insurance policy, or the ILIT can purchase the policy on your behalf. If you opt to transfer an existing life insurance policy into an ILIT and you die within 3 years of that transfer, the IRS will still include the proceeds in your estate for tax purposes. If you have the ILIT purchase the life insurance policy, you can avoid this, but you must fund the trust with sufficient money over the years to pay the premiums. 

If you and/or your spouse are the chief breadwinner(s) of the household, and that income is abruptly diminished while your children are young and there are substantial monthly expenses, oftentimes families are challenged to make ends meet. For some clients, especially those with young children and who also have a substantial mortgage to pay, life insurance can be a useful tool to “inject” cash into an estate at an unexpected time of need to help pay for your child’s living expenses so that your children’s home would not need to be sold to defray costs.

Make sense? If not, contact us!

US Treasury Confirms No Clawback

The Tax Cuts and Jobs Act (“Trump Tax Law”) of 2017 increased the federal estate tax exemption from $5 million dollars per taxpayer to $10 million. That amount is effectively doubled for married couples. The exemption amount is indexed for inflation, meaning that it goes up incrementally every year. It is the exemption amount in the year that someone dies that is used to calculate estate taxes owed. For this year (2020), the exemption amount, with inflation, is $11.58 million per person, or $23.16 million for a married couple. In simple terms, if someone dies this year owning less than $11.58 million (whether things, homes, cash, etc.), then no federal estate taxes are owed. 

The estate tax (gifts at the time of death) exemption is linked to our gift tax system (gifts during life). The amount of lifetime gifts you give is added to the total amount of property you own when you die. For example, if George makes $5 million of gifts during his life, and then dies owning $7 million worth of property, then he would be on the hook for $12 million of gifts. That would use  his entire $11.58 million dollar exemption, and his estate would owe some estate taxes. I know, it’s a pretty good problem to have.

The Trump Tax Law provision elevating the estate tax exemption is set to sunset (expire) on January 1, 2026. If Congress does nothing between now and then, the exemption level will revert back to the $5 million amount, indexed for inflation. Essentially, the exemption will be cut in half if Congress does nothing.

So what happens if someone makes lifetime gifts in 2025, and then the exemption amount reverts back to the lower amount in 2026, and then the person dies thereafter? (To use the example above, George gives $5 million in 2025 and then dies in 2027 when the exemption amount is “only” $5 million, indexed for inflation.)

On November 26, 2019, the Treasury Department and the IRS issued final regulations adopting the regulations that were proposed in November of 2018, effectively ensuring that if a decedent uses the increased exclusion amount for gifts made while the Trump Tax Law is in effect and dies after the sunset of the Trump Tax Law, the decedent won’t be treated as having made taxable gifts in excess of his or her exclusion amount.

In plain English, this means that there won’t be a clawback if George uses the exclusion amount in effect now, even if the exclusion amount is lower when George dies.  For George, the IRS will use the greater of the exclusion amount used during the transfer or on the date of death. So George will not be penalized later even though the exemption amount dropped.

The final regulations also reinforce the notion of a “use it or lose it” benefit and direct that a taxpayer who uses the exemption is deemed to use the base $5 million (indexed) exemption first and then the additional amount of exemption available through 2025.  For individuals dying after 2025, if no gifts were made between 2018 and 2025 in excess of the basic federal exclusion amount in effect at the time of death, the additional exclusion amount is no longer available. In other words, unless George uses the increased exemption amounts before 2026, he will not receive that benefit later.

Either way, the exemption amounts cover a vast majority of American estates. However, for very high net worth families, we anticipate very large transfers of wealth to occur between now and 2026 so that the benefit of the heightened exemption amounts are not lost.

Estate Planning for Noncitizen Spouses

Today, 44% of Californians were born out of the state. And the proportion of foreign-born residents (28%) is nearly double that of transplants from other states (16%). From an estate planning standpoint, the big-picture concepts hold true whether or not someone is born in California. Non-Californians own property just like Californians do. Similarly, most everyone has loved ones who they care for most, regardless of citizenship or residency.

However, tax treatment is different depending on one’s citizenship and residency. Complications arise when one or both spouses in a married couple are not U.S. citizens.

If you and/or your spouse are non-citizens of the United States, then two major concepts will play a role in your estate plan: 1) the Unlimited Marital Deduction; and 2) the Gift and Estate Tax Exemption.

1. Unlimited Marital Deduction
   Married citizen couples enjoy a tax benefit called the “unlimited marital deduction”. Citizen spouses can transfer property back and forth between each other⁠—lifetime gifts or transfers on death⁠—and it is never a taxable event. Non-citizen spouses do not get this benefit. If your spouse is not a U.S. citizen, and you give them a gift, then it is only tax-free up to $154,000 a year (in 2019). (This amount is indexed for inflation). For example, adding your non-citizen spouse onto the title of your family home could potentially become a taxable gift. Or upon the citizen spouse’s death, the non-citizen inherits all of the marital assets without the marital deduction. Thankfully, estate planners have techniques, like a Qualified Domestic Trust, to assist non-citizens avoid unnecessary taxable events.

2. Gift and Estate Tax Exemption
   Married couples who are both citizens, or if they are legal permanent residents (green card holders), are granted a unified gift and estate tax exemption. In plain terms, if citizens or green card holders transfer property in the amount of $11.4 million (in 2019) or less then no gift or estate taxes are owed. (This amount is also indexed for inflation). That amount includes all lifetime gifts with whatever you own at death. In large part, citizens do not need to worry about making transfers to their citizen spouses. However, non-citizens only receive a $60,000 exemption from the gift and estate tax. That’s not a typo. Leaving property to a non-citizen could result in a lot of estate taxes without proper planning. For more about the gift and estate tax, read our previous blog post.

Putting the above concepts to work, if spouses transfer property between each other, and the recipient spouse is a non-citizen, then the marital deduction is nonexistent, and the citizen spouse would have to employ their gift and estate tax exemption, if they have one, where they otherwise would not have to. Then later, if the non-citizen spouse passes property to any children, the non-citizen spouse would not have the gift and estate tax exemption a citizen spouse would have. The result could be an avoidable disaster.

Non-citizens largely have the same desires and wishes that citizens have. Their legal status is merely different than that of citizens. However, that legal distinction does create challenges for which a plan is necessary. Do not leave your loved ones with an undesired mess. Get ahead of the issues by planning now.

Married: You Either Are or You Aren't.

Have you heard that story about the couple who lived together for seven years, and then they accidentally became married? Or what about the one where your friends were in a “common law” marriage?

Well… they’re both bogus concepts. At least in California. We don’t even know where the “seven year” part came from.

In California, you’re either married with a state license and certificate from the county clerk (and a few other requirements) or you’re not married. Period. There’s no intermediary status. There’s no “common law” marriage. You can’t accidentally find yourself in a marriage. The law doesn’t care how long it took your significant other to propose, or the size of the ring… or whether there was a ring at all! There are a dozen or so states that recognize “common law” marriage, but we’re not one of them.

So how does the law view your live-in significant other? You know, the person you’ve been living with romantically for years?

To put it simply: short of marriage, the law views your significant other as a roommate. It doesn’t matter how long you’ve lived together, whether you have children together, or whether you share ownership of property. You need that marriage license in order to be considered lawfully married.

Married couples enjoy benefits that unmarried people do not. Married couples are legally considered family (for example: when visiting one another in a hospital, or for inheritance purposes, or for health care benefits). Unmarried couples cannot own community property. That’s only for married couples, too. Also, tax treatment for married couples is dramatically different than for an unmarried couple.

You may have heard of “Registered Domestic Partners”. Or just “domestic partners”. But that has its own set of requirements, and is governed by state law. It doesn’t happen accidentally or automatically. And it’s only recognized in a few states (including California), but not by the federal government, like marriage is.

A couple’s decision not to marry does not detract from the love, trust, support or any of the interpersonal relationship benefits married couples can share. However, it is important for an unmarried couple to know that the law treats couples in vastly different ways based solely on marital status. A marriage certificate may literally be “just a piece of paper” but that piece of paper has important legal ramifications.

If you would like to discuss how your situation would be affected by getting married (or not), please contact us for a free consultation.

Explaining the Gift and Estate Tax

The gift and estate tax are both transfer taxes. That means that they tax the transfer of assets from one person or entity to another. The amount of the tax is based on the value of the asset being transferred. For example, if I give you my 2007 Toyota Camry, then I am transferring an automobile from me to you. The value of that transfer would be the fair market value of the Camry when I transfer it. So we'd have to figure out how to value it (most likely look in Kelley Blue Book, or something similar) and the tax would be calculated based on that value, and I would owe any taxes generated on the transfer since I am the grantor (giver) of the gift. There are exemptions from paying the tax that I'll get into below. Also, this post only refers to federal transfer taxes. California does not impose state-level transfer taxes on gifts.

Let's first distinguish between the gift tax and the estate tax. I already told you that they're both transfer taxes. The gift tax is a tax on lifetime transfers. The estate tax--also affectionately called the "death tax" (they're the same thing)--refers to a tax on gifts through death (think: gifts made from wills or trusts; inheritances). So in my example above, about giving you my car, that would implicate the gift tax and not the estate tax. I gave it to you while I was alive.

If you make a lifetime gift, the grantor of the gift would owe the taxes. The same is true for death gifts. The estate of the person who made the gift would (typically) owe any estate taxes owed. (Some states have what is called an "inheritance tax" where the recipient also owes a tax, but California does not have an inheritance tax.)

Now that we've sorted out when each tax is implicated, let's figure out when you actually owe anything.

Both the gift tax and estate tax share a unified exemption amount. What that means in plain English is that you can transfer--either through life or death--a certain value of property, and you won't owe ANY transfer taxes. And that exemption amount is a whopping $11.18 million per person! That is not a typo. The latest tax law passed by Congress increased each person's exemption amount from $5 million to $10 million. And that amount is adjusted for inflation each year. That's how we got to $11.18 million. As of January 1, 2018, anyone making a gift may transfer up to $11.18 million worth of assets and pay zero taxes. The exemption amount is determined in the year you make the gift, or the year in which you died. That pretty much means that these transfer taxes do not apply to more than 99.98% of the population. If you're one of the lucky few who have more than that value in assets, then the transfer tax rate for the amount in excess is a flat 40%.

Please note that in 2026, this amount reverts back to the $5 million amount, and it will be adjusted for inflation to be somewhere around the $6 million mark per person.

A benefit that married couples get is that spouses can effectively combine their exemption amounts. So married couples can give away upwards of $22.36 million, and owe zero transfer taxes.

Wait, does this mean that I can cut a check for $1 million to my best friend, and I'll owe zero gift taxes? Yup, that's right. Except that I would need to let the IRS know that I made that gift by filing a gift tax return (Form 709). The IRS would then go over to my file and reduce my $11.18 million exemption by $1 million. Only $10.18 left to give away until I owe any transfer taxes!

Maybe some of you have heard that you are limited to a certain amount of gifts per year. What's that all about?

You're probably thinking of what's called the annual exclusion. The annual exclusion is an amount the IRS lets you gift in one single year, per recipient, and not have to file that gift tax return. If your gift is below the annual exclusion amount, then you don't have to tell the IRS about it. That amount is currently set at $15,000 per year, per recipient. Married couples may combine their gifts, so they effectively may make gifts up to $30,000 per year, per recipient and not have to file a gift tax return notifying the IRS.

So going back to my $1 million lifetime gift example, I would only notify the IRS of $985,000 of the gift since I get to use my annual exclusion on that gift to my best friend. If I'm married, I only need to tell them about $970,000 of the gift.

As you can see, transfer taxes are probably not going to be an issue for you. Actually, let me put it another way: if transfer taxes are a concern for you, we should hang out this weekend!