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Restoring Some Certainty


After years of uncertainty, the Congress and President in 2013 enacted permanent legislation that now provides definitive rules to estate planners and their clients on estate and gift taxes (at least until Congress and the President decide to change the rules at some time in the future).

The following summary is applicable only to persons who are United States citizens and residents of the United States. Different rules apply for gift tax and estate tax for others.


The annual exclusion for gifts to persons other than a spouse is $14,000 (in 2016) per donor, per donee. Total annual gifts not exceeding the annual exclusion are generally not subject to tax and no reporting of such gifts is required. The annual exclusion for gifts will be subject to future adjustments for inflation.

Gifts in excess of annual exclusion gifts are subject to the "unified tax rate" for both lifetime gifts and estates of deceased persons. Simply and generally stated, an individual has a gift tax or estate tax exemption equivalent of $5,450,000 (for 2016). However gifts in excess of annual exclusion gifts reduce the exemption equivalent available for lifetime gift taxes and estate taxes. As a simple example, if an individual makes a lifetime gift of $100,000 in excess of the annual exclusion, the excess reduces the exemption equivalent from $5,450,000 to $5,350,000. Assuming no further gifts in excess of the annual exclusion are made, the estate of the individual upon death will have a remaining exemption equivalent of $5,350,000 from estate taxes.

The exemption equivalent of $54250,000 effectively means that amounts in excess of $5,450,000 will be subject to a federal tax of at least 40%.


As set forth above, the exemption equivalent from estate taxes is $5,450,000 (for 2016). Estates less than $5,450,000 million dollars (assuming no lifetime gifts in excess of annual exclusion gifts) will not be subject to federal estate tax. Estates larger than $5,450,000 (assuming no lifetime gifts in excess of annual exclusion gifts) will be subject to a federal tax of at least 40% on the excess.

Any unused exemption equivalent upon the death of an individual is generally available for use by a surviving spouse. This concept and feature is commonly referred to as "portability". Thus a spouse who dies in 2016 with an estate of $3,000,000 will have an unused exemption equivalent of $2,450,000 ($5,450,000 minus $3,000,000). The unused exemption equivalent can be used by the surviving spouse thus increasing the surviving spouse's exemption equivalent to $7,700,000 ($5,450,000 plus $2,250,000) based on 2016 numbers. Remember the exemption equivalent is subject to adjustment each calendar year so the numbers in these examples will adjust each January 1 starting with January 1, 2017.


There is also a separate transfer tax on "generation-skipping transfers". This tax is in addition to any estate tax. The tax is generally imposed on transfers to a beneficiary who is more than one generation below that of the transferor. The exemption equivalent for generation skipping transfers is $5,450,000. Transfers in excess of this amount are subject to a flat tax rate of 40%.

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West, Longenbaugh and Zickerman P.L.L.C.

310 S. Williams Blvd
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Tucson, AZ 85711

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