The following is offered for informational and educational purposes only. It is not legal advice and should not be substituted for legal analysis of a particular situation.
FAQs: Estate and Gift Taxes and the South Carolina Death Tax.
1. What is the Estate Tax? The Estate Tax is imposed by the federal tax code on asset transfers from US citizens and certain other US persons, where the transfers are effective upon death, plus certain transfers during life. The Estate Tax threshold for year 2018 is $11.18 million per person under the Tax Cuts and Jobs Act adopted at the end of year 2017.
Historically, the Estate Tax threshold has increased over recent decades to $3.5 million in year 2009. There was no estate tax at all on estates for decedents dying in year 2010. For decedents dying in year 2011, the threshold was $5.0 million and was indexed for inflation for all years afterward. Inflation indexing continues in the current statute. The Estate Tax rate is 40% of the fair market value of assets transferred.
2. What is the “Unified Credit”? “Unified Credit” is an unofficial term meaning the Estate Tax and Gift Tax threshold level of transferred assets. Amounts totalling less than the threshold aren’t taxed, when all is said and done. (The actual calculation, of little interest to most folks, is more complex). The Unified Credit for 2018 $11.18 million.
3. What is the Gift Tax? The Gift Tax is also a federal tax. Congress created the Gift Tax so that Estate Taxes could not be evaded by making lifetime gifts rather than gifts through an estate. Total lifetime “taxable” gifts exceeding the estate tax threshold ($11.18 million per person for 2018) will result in a gift tax. All gifts beyond the IRS’s annual exclusion amount ($15,000 for 2018) must be reported to the IRS, even though they will usually not result in a gift tax.
4. What is a “taxable gift”? A taxable gift is a gift the value of which exceeds the then-applicable “annual exclusion amount," but only to the extent that the gift exceeds the annual exclusion amount. A "taxable gift" does not usually result in a gift tax.
5. Can you give an example of a taxable gift? Sure. Say that a mother gives each of her three children a gift of $20,000 on December 1, 2018, and makes no other gifts to them during the year. Each gift of $20,000 includes a taxable gift of $5,000. (IRS annual exclusion amount for 2018 is $15,000; $20,000 - $15,000 = $5,000 taxable gift per child). Mother’s total taxable gifts to the children in 2018 are $15,000. (3 x $5,000 = $15,000).
6. Why is the annual exclusion amount not the same every year? It’s indexed for inflation, but only in $1,000 increments. Once upon a time it was set at $10,000, but inflation has increased it over the years. If inflation stays relatively low, the annual exclusion amount will remain at $15,000 for more than one year.
7. Is it possible to benefit children, grandchildren, or others with more than $15,000 per year without needing to report the gifts? Yes, in some circumstances it is. Tuition payments and medical payments made directly to the service provider can generally be excluded from reporting as well.
8. What is a Death Tax? State-imposed estate taxes are usually called Death Taxes simply to distinguish them from the federal Estate Tax. South Carolina currently imposes no Death Tax.