Q: Weren’t estate taxes eliminated in Ohio?
A: While the Ohio estate tax was repealed effective January 1, 2013, a decedent’s estate may have to pay a federal estate tax if the gross estate is more than $5.45 million dollars (“the exempt amount”).
Q: What is the tax rate for estates that exceed the exempt amount?
A: The tax rate is 40 percent. This rate also applies to generation-skipping transfer tax (when, for example, a distribution is made from a grandparent to a grandchild).
Q: Can any tax deductions be taken from the decedent’s gross estate?
A: Yes. Typical deductions include expenses associated with the decedent’s funeral and burial, debts and obligations, gifts to charities and most transfers to the surviving spouse (the "marital deduction").
Q: Should an estate file a federal estate tax return if all assets are transferred to the surviving spouse?
A: Maybe. When the decedent’s gross estate exceeds the exempt amount, a return (Form 706) must be filed even if the taxable estate is zero. Also, the estate may elect to file a return when the gross estate is less than the exempt amount. Doing so may allow the surviving spouse to leave combined net assets of $10.9 million dollars in the estate, but the family would not have to pay federal estate taxes.
For example, let’s say a man dies and leaves $4 million dollars to his spouse. His surviving spouse does not have to file a federal estate tax return. If the spouse has $4 million dollars of her own assets plus the $4 million dollars she inherited from her husband, her gross estate would be $8 million. Approximately $3 million dollars of this $8 million would be subject to federal estate taxes. However, if she files a federal tax return at the time of her husband’s death, she can claim the unused exempt amount of $4 million dollars for her husband as well as her own exempt amount. This will leave her with a combined $8 million dollar exempt amount, which will eliminate the federal estate tax. This is called a "portability election."
Q: Will accounts held as “transfer on death” or “payable on death” avoid federal estate tax?
A: No. The transfer of property can be accomplished quickly after a person’s death through the titling of assets as “transfer on death” or “payable on death,” but most of these assets will not escape estate tax liability.
Q: Can I give all of my property away during my life to avoid estate taxes?
A: No. The federal tax structure is considered a “unified” estate and gift tax system. This means that transfers made while you are alive are added together with those that are distributed when you die to determine if your total assets exceed the exempt amount. This is called a lifetime computation.
Q: How does the federal gift tax work?
A: Under the current law, an individual can give $14,000 (“the annual exclusion”) to another person (the “donee”) without filing a federal gift tax return. The annual exclusion is based on the amount of the gift made to each donee and not on the total amount given by the donor. For example, one parent can give $14,000 to each of his or her four children (a combined gift of $56,000) without filing a gift tax return. If the donor is married, the annual exclusion can double (called “gift splitting”). Thus, this couple could give $28,000 to each child without filing a gift tax return even though only one spouse made the gift. When the aggregate amount exceeds $14,000 per donee, a gift tax return (Form 709) must be filed by April 15 following the calendar year. The excess amount over the $14,000 reduces the future exemption amount available when the donor dies.
Q: I received a gift of property from my parents. Do I have to pay taxes on its value?
A: No. You do not have to report the gifted asset as income. However, if you sell the property at a later time, then you will have to pay income taxes based on your parents’ basis. “Basis” is the amount a person pays to purchase a property plus whatever the person spent to improve the property. For example, let’s say a couple paid $15,000 for their home in 1950. When they deeded the house to their only son in 2014, its value was $100,000. When their son sells the home, he will have a capital gain of $85,000. The son will have to pay taxes on this capital gain amount.
This “Law You Can Use” column was provided by the Ohio State Bar Association. It was prepared by attorney James B. Curtin of the Columbus firm, Hrabcak & Company, L.P.A.