Shafae Law

Shafae Law

Shafae Law is a boutique law firm providing comprehensive estate planning, trust, estate, probate, and trust administration services located in the San Francisco Bay Area.

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!

What is an Estate Plan and do I need one?

This is by far the most common question we receive. The word "estate plan" seems like it means so many things, and it's difficult for people to nail down what it entails. You know why? Because it does mean so many things.

An estate plan is a general term that encompasses all of the tools one can use to plan for two events: a) their eventual death; or b) their potential incapacity. Most people contemplate option a), albeit very passively. Option b) is one people very often forget about. Incapacity is when you cannot make your own financial or medical decisions. Think: coma, dementia, etc. You're still alive, but someone else needs to make decisions for you. In that event, someone else needs the legal authority to make decisions on your behalf. You can either give it to them ahead of time in a power of attorney, or someone can petition a court to grant them that authority in a conservatorship proceeding.

In planning for your death, there are two basic ways to pass on (distribute) your assets upon your death. One, by using a last will. Two, by employing a living trust. The former requires a court process called "probate", whereby a judge overseas all of the affairs of your estate administration (paying your creditors, selling estate assets, and eventually distributing your assets to your rightful beneficiaries). The latter is a private document that keeps the courts (and the public) out of your estate administration. The probate process can be expensive. For example, the fees (paid to your executor and their attorney) can be as high as $46,000 for an estate valued at $1,000,000. Most properties in the Bay Area are at or above that amount. So you can see that an estate in the probate process can be quite expensive. The probate process can also be lengthy. Most probate administrations take an average of 18 to 24 months to complete.

Now that we've covered what an estate plan might entail (trust, will, powers of attorney), who needs one? Well, in one word: everyone. Everyone will die someday, and you never know when/if you'll ever be incapacitated. The more nuanced question is, "Do I need an estate plan that includes a living trust?"

If the answer to any of the following questions is "yes" then you probably need an estate plan that includes a living trust.

  1. Does the total value of your assets (cash, personal property, real estate, cars, investment portfolio, etc.) exceed $150,000 in the aggregate?
  2. Do you own real estate valued over $50,000?
  3. Do you have children under the age of 18?
  4. Have you divorced someone with whom you had children?
  5. Are you in a mixed marriage (one or both of you have children from a previous relationship)?

Please keep in mind that if you think you don't need an estate plan with a living trust, if you're over 18 years of age, you at least need a last will and a power of attorney. For example, if your child is about to head off to college, they're over 18 years of age, and they unexpectedly fall into a coma, you have no legal authority to make decisions on your child's behalf absent a power of attorney or court order.

If you'd like to speak in further detail about your personal situation, please do not hesitate to contact us for a free consultation.


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Redwood City, California 94065


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