The federal estate tax was in a
state of flux from 2001 until 2013.  We
saw the “coupon” amount (the amount that can be transferred without estate or
gift tax liability) go from $1 million to $5 million, and in 2010, the estate
tax took a 1-year vacation.  The estates
of people who died that year could pass entirely free of estate tax.  Things seem to have stabilized, with Congress
setting the coupon amount at $5 million. 
What is more, the coupon is adjusted for inflation, so the total
exemption is $5.25 million in 2013 and $5.34 million in 2014. 

Here is a simplified explanation of
the way the federal estate and gift taxes work: 
when a person dies, the value of everything he or she owned is
determined, and, if that value exceeds the coupon amount, the excess value is
taxed at 40%.  The estate tax is due, in
cash, 9 months after the person died.  If
a person gives property away during life, then the first $14,000 of value given
to each of an unlimited number of recipients is ignored, and the person’s
coupon is applied against any excess value given away.  In other words, if a mother gives her
daughter $25,000 worth of assets, the first $14,000 is ignored by virtue of the
annual gift tax exclusion, and the $9,000 excess is sheltered by the mother’s
coupon amount.  The following year, the
mother can give her daughter another $14,000 with no transfer tax consequences,
and again, the mother’s coupon can be applied against any excess value given to
the daughter.  This process can continue
for the remainder of mom’s lifetime, and when mom eventually dies, whatever is
left of her coupon can be applied against the assets she owned at death.  If there is not enough remaining coupon to
cover the remaining assets, the 40% estate tax will gobble up a portion of the
excess value.  If mom used up her coupon
during her lifetime but still owned some assets at death, the estate tax will
consume 40% of her estate.  If mom used
up her coupon during life and continued giving assets away, she could continue
to shelter the first $14,000 given away per recipient per year, but any excess
gifts would be subject to a 40% gift tax.

There is yet another transfer tax
imposed by the Internal Revenue Code.  It
is the “generation-skipping transfer tax” (GSTT), which imposes a 40% tax on
top of any gift or estate taxes payable if the transferor gave something to
someone who was 2 or more generations younger than the transferor.  As a general rule, the annual exclusion and
the coupon amount can be used to shelter generation-skipping transfers from


Not content to sit on the sidelines
while Congress has all the fun, the Hawaii State Legislature enacted an estate
tax and GSTT in 2010.  Essentially, the
Hawaii tax adds another 10% on top of any federal transfer tax payable.  Hawaii currently has no gift tax and it has a
coupon that matches the federal coupon. 
However, there is a move afoot to establish a Hawaii gift tax and to set
the Hawaii coupon amount at a lower value than the federal coupon.  If this happens, a surviving spouse of
someone who died with an outdated estate plan may end up with unexpected (but
avoidable) tax liability.  The kind of language that has worked for
literally decades to postpone all estate tax until both spouses are gone, will no
longer work.  It is uncertain whether Hawaii will take this step, but
don’t count on the State easily passing up a potential revenue source.


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