Trust & Estate Planning

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Virginia Estate Tax Considerations

There is no current Virginia Estate Tax. The 2006 General Assembly House Bill 5018 repealed the state Estate Tax in the Commonwealth of Virginia for estates of decedents whose date of death was on or after July 1, 2007.

Estate Taxes may vary from state to state and may not have the same consequences as Federal Estate Taxes. Additionally, other types of taxes may impact Estate Taxes generally. For example, Federal Estate Taxes and some state Estates Taxes are impacted by Gift Taxes, in that the amount of the exclusion allowable is deducted from the amount of living gifts that the decedent made during their lifetime. You must always consider the gifts a person made during their lifetime when calculating Estate Tax exclusions. During a probate or trust administration, it is important to locate any gift tax returns that have been filed on the decedent’s behalf.

Federal Estate Tax

Modern History of the Federal Estate Tax

Federal Estate Taxes are a constantly changing landscape. On December 17, 2010 President Barack Obama signed into law the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (“TRUIRJCA”). As far as Federal Estate Taxes are concerned, TRUIRJCA changed the Federal Estate Tax exclusion to $5,000,000 with a top tax rate of 35% for estates exceeding $5,000,000 until December 31, 2012.

Prior to the ATRA, described below, after December 31, 2012, unless it had been amended, the Federal Estate Tax would have returned to the 2002 Federal Estate Tax rate, which was $1,000,000 exclusion and a top tax rate of 55%. Due to the then uncertainty of the Federal Estate Tax for the future, estate planners learned to be diligent in creating estate plans that prepared for the likelihood that the estate tax would return to the 2002 Federal Estate Tax rate, which should have allowed for more flexibility in their estate plan design.

Current 2013 Federal Estate Tax Law

In early 2013, President Barack Obama and congress enacted the “American Taxpayer Relief Act” (“ATRA”).  As far as federal estate taxes are concerned, the ATRA maintained the $5,000,000 exclusion created by TRUIRJCA.  With the inflation index, the $5,000,000 exclusion is approximately $5,250,000 in 2013.  The top tax rate for 2013 and future years will now be 40%.

The exclusion amount means that an individual is allowed to transfer approximately $5,250,000 during their life and at death, without invoking an Estate Tax or Gift Tax on the estate. If the estate is worth more than $5,250,000, then the amount over that $5,250,000 is taxed at a top tax rate of 40% for the Federal Estate Tax. For example, if an individual’s estate, at death, is worth $7,250,000, then under ATRA, $5,250,000 is excluded from the Federal Estate Tax and the remaining $2,000,000 is taxed at a top tax rate of 40%. Without ATRA, only $1,000,000 would have been excluded from the Federal Estate Tax and the remaining $6,250,000 would have been taxed at a top tax rate of 55%. Therefore, without ATRA, $3,437,500 would have been lost to Federal Estate Taxes as opposed to $800,000.

The new estate tax laws have a long future ahead of them, which should allow individuals and families who are concerned with estate planning and recent history of an uncertain tax code to take the necessary steps to meet with a skilled and experienced attorney to draft these extremely valuable and important documents.

Gift Tax

There is no Virginia Gift Tax. The 2006 General Assembly House Bill 5018 repealed the state Estate Tax in the Commonwealth of Virginia for estates of decedents whose date of death was on or after July 1, 2007. This repeal also repealed the state Gift Taxes in the Commonwealth of Virginia.

In many ways Gift Taxes and Estate Taxes go hand-in-hand. Much like Estate Taxes, Gift Taxes vary from state to state and also vary between the state and federal levels. Gift Taxes are imposed on the Donor of a gift and the recipient of a gift must report it as Income Tax. Additionally, it is important to note that not all gifts are taxable. For example, gifts that are below the exclusion limit for that year, gifts to charities and political organizations, and gifts to spouses who are United States Citizens are not taxable as Income Tax.

Federal Gift Taxes Exclusion Limit

The 2013 exclusion amount for Federal Gift Taxes was increased for gifts made on or after January 1, 2013 to an annual amount of $14,000, with inflation, per individual or organization. Federal Gift Taxes are subject to change as illustrated in 2002 ($11,000), 2006 ($12,000), and 2009 ($13,000). This means that you may gift $14,000 to as many different people and organizations as you would like, annually, without incurring any Federal Gift Tax up to the Estate Tax exemption limit in order to be non-taxable. In addition, a married couple may join their annual gift exemptions to allow for a non-taxable gift of $28,000 per individual each year.

Inheritance Tax

Virginia does not collect Inheritance Tax. The 2006 repeal by the General Assembly also repealed state Inheritance Taxes in the Commonwealth of Virginia.

Whereas Estate Taxes are taxes on the decedent’s estate directly as a whole, Inheritance Taxes are taxes on the beneficiaries of a decedent’s estate. Inheritance Taxes are essentially a determination of how much in income taxes the beneficiaries of an estate will have to pay, if any, and are based on the net value of the portion of the estate they are receiving.

Federal Inheritance Tax

In order to calculate Federal Inheritance Taxes you must first add up the fair market value of the entire estate, known as the ‘Gross Estate.’ After the value of the ‘Gross Estate’ is calculated, the estate will remove any deductions and adjustments which may include estate costs such as court costs in probate, administration costs, and attorney’s fees. After the deductions are calculated from the ‘Gross Estate,’ the net value of the estate remains and will act as the basis for inheritance taxes. This basis will determine if the beneficiary is subject to any Income Taxes from the estate, known as the Inheritance Tax, and if so, for how much. The amount of Federal Inheritance Taxes can be affected by various factors such as the net value of the estate and the relationship between the decedent and the beneficiary. It is important to speak with an attorney or tax expert to maximize your tax advantage.

Virginia Estate Income Tax

Protect Heirs by Considering Income Taxes When Drafting a Will or Trust

An estate will need to pay the income taxes, federal and state, that the decedent would have had to pay for the year prior to his death based on the income the decedent had realized at that point. Therefore, the estate administrator or executor of the estate will need to insure that these taxes are paid out of the estate. Additionally, in order to benefit an estate with pre-tax dollars, estate planners need to factor income tax elements into the construction of an estate plan in order to maximize the tax advantages of retirement plans such as a 401(k).

Income Taxes on Donations

It is also important to note that the Donor of a gift, as well as the Donee, should recognize that Donees of a gift will be responsible for paying Income Taxes on the amount realized for a gift.

Virginia Estate Spousal Exemption

The Spousal Exemption is a tax exemption applicable to Estate Taxes that allow for a beneficiary spouse to receive the estate of a decedent spouse tax free regardless of the value of the estate.

*This exemption applies only to legally married people and the beneficiary spouse must be a citizen of the United States.

In early 2013, President Barack Obama and Congress signed into law the “American taxpayer Relief Act” (“ATRA”). As far as the Federal Estate Tax is concerned, this Act changed the Federal Estate Tax exclusion to approximately $5,250,000, with inflation, with a top tax rate of 40% for estates exceeding $5,250,000 in 2013 and future years going forward. ATRA in conjunction with the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act” (“TRUIRJCA”) also allowed for spousal portability, meaning that if a decedent spouse leaves their estate to the beneficiary spouse, the beneficiary spouse will receive the Spousal Exemption. However, portability also allows for the decedent spouse to pass their estate with their $5,250,000 exclusion. Therefore, the surviving spouse has a potential $10,500,000 exclusion they can use to pass to their heirs and beneficiaries.

*The Spousal Exemption does not apply to beneficiary spouses who are not United States Citizens even if the beneficiary spouse is a permanent U.S. resident. If a Non-U.S. Citizen Spouse is named as the beneficiary of the decedent spouse they will be subject to the estate tax exclusion amount the same way that a non-spouse beneficiary would be.

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