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IRS Estate and Gift Tax Exemption

The IRS Announces the 2020 Estate Tax Exemption and the 2020 Gift Tax Exemption

Every year the Internal Revenue Service (IRS) releases the annual estate tax exemption for those passing away during the calendar year as well as the annual gift tax exemption for those gifting assets within the calendar year. For the calendar year of 2020, the IRS has announced the following exemptions.

2020 Gift Tax Exemption: $15,000.00 (Curious how to maximize your gift tax exemption? Read below.)

2020 Estate Tax Exemption:  $11,580,000.00 (Curious how to maximize your estate tax exemption? Read below.)

 

What Does the 2020 Gift Tax Encompass?

For anybody subject to the United States tax code, if you make a gift under the 2020 exemption amount of $15,000 you are not required to report the gift, and it is exempt from the gift tax. If you make a gift greater than the exemption amount, you are required to report the gift on the IRS Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return. If your gift (in aggregate) to any one individual is greater than the annual exemption amount, the overage is reported to the IRS and decreases your lifetime exclusion amount. This will in turn reduce your estate tax exemption, outlined below.

How to Maximize the 2020 Gift Tax Exemption

The 2020 gift tax exemption applies separately to each donor and to each recipient. That means that you could gift an unlimited number of individuals $15,000 each, if you were so inclined. It also means that if you are married, you and your spouse can combined contribute $30,000 in 2020 to each individual.

Why might you want to make a gift? Well the first and obvious answer is that you are charitable! People regularly gift to their family. For instance, you may make gifts to your adult children to help with specific needs (ie buying a car, paying for college, down payment for a house, etc.). But gifting becomes more important from a tax perspective if your family will be subject to the estate tax upon your death and your spouse’s death. When this is the case, it may be prudent to annually gift the exemption amount to reduce your taxable estate. For instance, if you have two children, you and your spouse can gift $30,000 to each child, reducing your estate by $60,000 for 2020. This is a double victory. You get to see the benefit your gift provides to your children during your lifetime, and it reduces the tax your estate will be subject to upon your death. Annual gifting can be particularly powerful in conjunction with 529 Plans, which permit frontloading of funds for an even greater estate reduction. These strategies are important to discuss with your estate planning attorney, accountant, and financial advisor.

 

What Does the 2020 Estate Tax Encompass?

For anybody passing away in the calendar year 2020, if your estate is greater than the annual exemption amount of $11,580,000, then your estate will be subject to the Federal estate tax (unless further planning is implemented). For those estates, the representative of the estate/trust will file IRS Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return). It is important to note that the 2020 figure is per spouse. The Federal Tax Code (but not the Illinois Tax Code) permits portability of a deceased spouse’s unused exemption, meaning that if one spouse passes away only using a portion of his/her applicable estate tax exemption, the second spouse to pass away can use the unused estate tax exemption in addition to his/her own estate tax exemption.

It is important to note that any gift to an individual that has surpassed the annual gift tax exemption will reduce the estate tax exemption available proportionally.

For estates greater than the exemption amount, it is extremely important to work with an estate planning lawyer such as our estate planning lawyers at Johnston Tomei Lenczycki & Goldberg LLC. There are great opportunities to limit a family’s exposure to the estate tax and maximize the various exemptions available. Ultimately such planning techniques can save your family significant sums of money.

The Estate Tax Exemption Only Applies to the Federal Estate Tax

One important item of note is that the above-mentioned estate tax exemption only applies to the Federal Estate Tax. For residents of the State of Illinois, a separate estate tax also applies. For 2020, the Illinois estate tax exemption is $4,000,000, a figure that is much lower than the Federal exemption. This means that for those residents of Illinois passing away in 2020, it is much more likely that the estate is subject to the Illinois estate tax rather than the Federal estate tax. Therefore, even if your estate does not surpass the Federal estate tax exemption, your estate may very likely be subject to the Illinois estate tax.

What Assets are Considered When Determining the Ultimate Value of an Estate?

When determining the value of your estate, it is important to consider all potential assets. Some estate assets are obvious:  cash in the bank, qualified retirement accounts, investment accounts, real estate, cars, etc. Some assets are less obvious: the death benefit on a life insurance policy, ownership interests in a business, precious metals, unclaimed property, among others. It is crucial that when you are planning your estate to consider all assets, and to discuss the assets with an estate planning lawyer such as the Illinois estate planning lawyers of Johnston Tomei Lenczycki & Goldberg LLC.

Estate Planning is Crucial

Estate planning can reduce your exposure to the estate tax upon your death and your spouse’s death. We utilize various estate planning documents to ensure that your estate tax and gift tax exemptions are optimized, including revocable living trusts, pour-over wills, powers of attorney, irrevocable life insurance trusts (if needed), credit shelter trusts a/k/a AB trusts (if needed), and annual gifting strategy. The goal of these estate planning techniques is to reduce your estate tax exposure and ensure that your beneficiaries receive the maximum amount of your estate tax free. (See our article on the Illinois Estate Tax here to understand just how much money is at stake). The estate plan documents also help to reduce friction in the family (and hopefully avoid litigation) and to ensure that the right people are acting on your behalf if you are unable to make decisions yourself. The planning is crucial for any adult individual in Illinois, regardless of wealth.

Contact the Libertyville Estate Planning Lawyers at JTLG LLC

If you are looking for an experienced Libertyville and greater Lake County estate planning lawyer, reach out to our law office to schedule a no-charge initial consultation. At our initial meeting our Libertyville estate planning attorneys will go over your personal information, family situation, and assets to determine the plan that best fits your needs. Your ultimate estate planning goals are our priority. We will help you minimize exposure to the Federal and Illinois estate tax, create the necessary documents to bequeath your assets to your family, and to make sure your personal decisions are made by your desired agents. Everybody needs an estate plan. To create yours, call us today at (847) 549-0600.

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Johnston Tomei Lenczycki & Goldberg LLC

Phone Number: (847) 549-0600
Fax Number: (847) 589-2263

Libertyville Office
350 N. Milwaukee Ave., Ste. 202
Libertyville, IL 60048

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