The annual federal exemption amount for the estate and gift tax has been adjusted to $5,490,000.00 per individual for 2017.  This means a married couple will have a combined $10,980,000.00 in 2017.  The $5,490,000.00 represents the amount that each U.S. Citizen may pass, transfer tax free, in 2017.  (This is the cumulative amount that may be passed during lifetime by gift and at death without federal gift or estate taxes being imposed.)  Not included in this total are annual exclusion gifts, certain gifts for education and certain gifts for medical expenses.  The annual exclusion amount is unchanged in 2017 at $14,000 per year per recipient.  Properly handled – there are no limitations on gifts for education or for medical expenses.

One of the benefits of making lifetime gifts is that any appreciation of the gifted assets occurs in the hands of the recipient instead of inside your estate.  For example, Jane gifts a summer house valued at $200,000.00 in 2017 which appreciates in value during her lifetime to a value of $400,000.00 at her death.  While Jane has used up $200,000.00 of her lifetime exclusion, the appreciation ($200,000) has occurred outside of her estate and will not be included in her estate at her death. Jane will be required to file a gift tax return, in which she will report the gift and reflect the reduction of her exemption from $5,490,000 to $5,290,000.  In addition, Jane may take advantage of annual exclusion gifts, gifts for education, and gifts for medical expenses without reducing her exemption amount.  There are numerous considerations that should be evaluated when considering making lifetime gifts – ensuring that your objectives are met require careful planning and documentation.

To the extent a person does not fully “use” their exemption during lifetime or at their death, their unused exemption may be transferred to their surviving spouse at death.  This is commonly referred to as “spousal portability” but more properly referred to as the Deceased Spousal Unused Exclusion or “DSUE”.  The option to transfer this unused amount is only available to a surviving spouse, not children or other individuals.  So using our same example above, if Jane made taxable gifts of $200,000.00 during her lifetime and died in 2017, she would have $5,290,000.00 remaining exemption that could be transferred to her spouse.

While South Carolina does not have a state estate tax, many other states do, so careful attention should be paid to potential state inheritance or estate tax issues, especially when an individual moves to a new state.

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