Congress sets the amount that an individual can transfer tax-free either during life or at death. The current estate tax exemption is so high that very few estates will have to pay an estate tax.
In 2017, Republicans in Congress and President Trump doubled the federal estate tax exemption and indexed it for inflation. In 2019, the exemption is $11.4 million for individuals and $22.8 million for couples. That means that as long as your estate is valued at under the exemption amount, it will not pay any federal estate taxes. The lifetime gift tax exclusion – the amount you can give away without incurring a tax – is also $11.4 million. But you can still give any number of other people $15,000 each per year (in 2019) without the gifts counting against the lifetime limit. In 2026, the exemption is set to drop back down to the previous exemption amount of $5.49 million (adjusted for inflation).
The gift and estate tax rate is 40 percent. This means that if you transfer more than $11.4 million either during your life or upon your death, your estate will be taxed at 40 percent. In addition, spouses can leave any amount of property to their spouses, if the spouses are U.S. citizens, free of federal estate tax. The estate tax exemption is also "portable" between spouses. This means that if the first spouse to die does not use all of his or her $11.4 million exemption, the estate of the surviving spouse may use it. So, for example, John dies in 2019 and passes on $10 million. He has no taxable estate and his wife, Mary, can pass on $12.4 million (her own $11.4 million exclusion plus her husband's unused $1 million exclusion) free of federal tax. (However, to take advantage of this Mary must make an "election" on John's estate tax return.)
The currently high federal estate tax exemption, coupled with the portability feature, might suggest that "credit shelter trusts" (also called AB trusts) and other forms of estate tax planning are needless for other than multi-millionaires, but there are still reasons for those of more modest means to have a trust or do other planning, and one of the main ones is state taxes. Several states also have an estate or inheritance tax and in most cases, the thresholds are far lower than the current federal one.
Making Gifts: The $15,000 Rule
One simple way you can reduce estate taxes or shelter assets in order to achieve Medi-Cal eligibility is to give some or all of your estate to your children (or anyone else) during their lives in the form of gifts. Certain rules apply, however. There is no actual limit on how much you may give during your lifetime. But if you give any individual more than $15,000 (in 2019), you must file a gift tax return reporting the gift to the IRS. Also, the amount above $15,000 will be counted against a lifetime tax exclusion for gifts. This exclusion was $1 million for many years but is now $11.4 million (in 2019). Each dollar of gift above that threshold reduces the amount that can be transferred tax-free in your estate.
The $15,000 figure is an exclusion from the gift tax reporting requirement. You may give $15,000 to each of your children, their spouses, and your grandchildren (or to anyone else you choose) each year without reporting these gifts to the IRS. In addition, if you're married, your spouse can duplicate these gifts. For example, a married couple with four children could give away up to $120,000 to their children in 2019 with no gift tax implications. In addition, the gifts will not count as taxable income to your children (although the earnings on the gifts, if they are invested, will be taxed).
Charitable Gift Annuities
Another way to remove assets from an estate is to make a contribution to a charitable gift annuity or CGA. A CGA enables you to transfer cash or marketable securities to a charitable organization or foundation in exchange for an income tax deduction and the organization's promise to make fixed annual payments to you (and to a second beneficiary, if you choose) for life. A portion of the income will be tax-free.