DID YOU KNOW? News You Need Now From Perkins Coie's Family Office Services Group

by Perkins Coie
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Welcome to the Family Office Services Group's new update series "Did You Know?"  It is an easy-to-read, timely and brief focus on legal issues and developments facing you and Family Offices throughout the year.  

In our first edition of "Did You Know?" we look ahead to the end of the year and the many tax concerns that can arise as the calendar year closes.  For example, if you are considering making a donation to your alma mater, did you know that not all donations to educational institutions are considered gifts?  Read below to learn about other year-end issues you should review to keep your planning on track.  

Have a topic you would like to see us cover? We welcome your suggestions.  Please email your ideas to: MMcDaniel@perkinscoie.com

Federal Estate and Gift Tax Exemption – Increased in 2013

The current exclusion from the federal estate tax and the federal gift tax is $5,250,000, increased from $5,120,000 in 2012.  This increase, which results from an annual inflation adjustment, allows taxpayers to give additional amounts in 2013.  The current effective tax rate for transfers above this threshold is 40%. 

Annual Exclusion Gifts

In 2013, each person (donor) now has an annual exclusion from the application of the federal gift tax of $14,000 in value of assets per recipient (donee) per calendar year.  Note that this amount is indexed for inflation and is rounded to the nearest multiple of $1,000.  There is no limitation on the number of donees.  Annual exclusion gifts do not use the donor's federal estate and federal gift tax exemption.  The gifts must be completed by December 31 in order to qualify for the calendar year exclusion.   

Gifts, Tuition and Medical Expenses

Payments that are made by a donor directly to an educational institution are not considered "gifts" for gift tax purposes.  In addition, payments that are made directly to the provider of medical services, which includes health insurance premiums, are not considered "gifts" for gift tax purposes. 

Income Tax Basis of Transferred Assets

Gifts are favored under the income tax law - property received by way of gift or inheritance is not includible in the donee's income and generally has no adverse tax consequences.  However, a donor should be aware of the differences between the income tax basis treatment of assets that are given and the assets that are inherited at death.

When assets are given, the donor's income tax basis in the given property is transferred to the donee.  When assets are transferred at death, the income tax basis of inherited property is its estate tax value in the decedent's estate, which is usually its fair market value at the time of the decedent's death.  As a matter of overall strategy, donors commonly make lifetime gifts of cash or slightly appreciated property and either retain highly appreciated assets until death or use such assets to make charitable gifts. 

Washington State Estate Tax –  Changes in 2014

Beginning on January 1, 2014, the Washington state estate tax exclusion will be indexed for inflation.  Thus, the exclusion amount, currently $2 million, will increase over time, similar to the federal estate tax exclusion.

The Washington state estate tax rates will increase as well.  The highest marginal rate on assets in excess of $11 million increases from 19% to 20% as of January 1, 2014.  In addition, assets between $6 million and $8 million will be taxed at 18% (formerly 17%), assets between $8 million and $9 million will be taxed at 19% (formerly 18%), and assets between $9 million and $11 million will be taxed at 19.5% (formerly 18.5%).

The state of Washington does not impose a gift tax.  Thus, Washington residents may be able to avoid the Washington state estate tax by giving assets during their lifetimes.

A $2.5 million deduction is now allowable against the Washington state estate tax for a qualified, family-held business.  There are specific tests that must be met in order to qualify for the deduction. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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