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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10146
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Gift Tax and Estate Tax I'm trying to understand this.

Customer Question

Gift Tax and Estate Tax I'm trying to understand this. In a home of a widower, $5.4 in gifts have been given out. With the estate gift tax, does that mean an additional $5.4m can be given out completely tax free to the giver and recipient? And if the recipient
sells the gift that there's only tax on the difference between value set at death and the sales price he gets? (can he have a loss)?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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OK, First, we have to differentiate (for capital gain/sale by recipient purposes) between lifetime gifts and assets received through inheritance.

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Gifts given during life have carry-over basis ... The tax basis of the giver carries over to the recipient.

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Assets received through inheritance (from the ESTATE ) get a step up in tax basis...to the fair market value on the date of death of the decedent.

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So, yes, if an asset is received through INHERITANCE, if the asset is sold at something LESS than fair market, the. Beneficiary COULD have a loss.

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This is much less likely to happen if the asset is received through GIFT, because the tax basis there, is the basis that carried over from the giver.

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THAT's capital gains

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For ESTATE/Gift tax purposes, the tax is a unified system... Meaning that once assets greater than $5,430,000 (for those dying in 2015) transfer, there will be a 40% tax.

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So, if the decedent gave away, say 3,000,000, during life, then there could be another $2,430,000 passed by the estate without estate tax.

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Let me know if you have questions...

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Lane

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Customer: replied 1 year ago.
Hi:
I always believed that if you've used up the $5+m in gifts and then die, that whatever's left of your estate goes to whoever you've willed it to, but they have to pay the 50% (or whatever the number is) tax on it. Usually sell it. However, I read the attached article from Forbes with wording that makes it fuzzy for me. It seems like they're saying that there's both (e.g. $5m or whatever you use of it before you die, and then $5m for the estate).
Expert:  Lane replied 1 year ago.

No,

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That's incorrect.

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You may have heard the term, UNIFIED gift and estate tax system.

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The fact that it's the same tax is what the "unified" piece is referring to.

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As an example, you may know that when one gifts an amount that's over the annual gift tax exclusion (14,000 per donee per year) that they must file form 709 (gift tax form), but yet no tax is due.

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This is because OF the fact that this is a unified system. The purpose of the tax form (even though no tax MAY be due) is to track AGAINSt that lifetime gift and estate tax exclusion.

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Now, you MAY have heard about a new aspect of the law that was made permanent only a couple of years ago, called "portability."

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For a married couple ( IF the first spouse to die's executor makes a timely election on the first spouses estate tax form - form 706 ) then the exemption is ported over to the second spouse to die - effectively passing 2 x the exclusion (10,860,000) to the heirs (assuming no lifetime gifts over the annual exclusion) without the transfer tax.

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But, no, all lifetime gifts (over and above the 14,000 per person per year exclusion) "eat away" at the potential to pass assets tax free to the next generation.

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Hence the name, "unified credit."

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Hope this helps to clarify

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Lane

Expert:  Lane replied 1 year ago.

Did you see my follow-up answer to your follow-up question?

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Let me know if you need more here, let me know.

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Lane

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