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Estate Tax Planning in Arkansas

While recent legislation has reduced the impact of the Federal Estate Tax for most taxpayers, where this excise tax applies with a maximum rate of 40 percent, which in most cases could easily be avoided with proper planning, it cannot be totally ignored.  In fact, compliancy often results in costly pitfalls.

The estate tax, commonly referred to as a death tax or inheritance tax, is imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.  Since enterprising individuals attempted to give property away before they died, the estate tax is actually only one part of the Federal Unified Transfer Tax scheme consisting of Estate Taxes, Gift Taxes, and Generation-Skipping Transfer Taxes.

The estate tax begins with the calculation of a decedent’s gross estate.  The gross estate for estate tax purposes is much broader then a probate estate and includes the value of any interest owned, in whole or in part, at the time of death.  The value of certain lifetime transfers made is added back, and after reductions for allowable deductions and credit given for gift taxes paid during life, the net estate tax is calculated and, along with any generation skipping tax, is due 9 months after the date of death.


Federal Estate Tax Exemption

Estates are entitle to a Unified Credit against gift and estate taxes.  A $5 million exemption adopted December 17, 2010, under the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (TRA 2010) and made permanent on January 2, 2013, as part of the American Taxpayer Relief Act of 2012 (ATRA 2012) was indexed for inflation and results in an exclusion amount of $5.49 million as of 2017.

With adoption of the Deceased Spousal Unused Exclusion (DSUE) or “portability” provisions which allow the unused exemption of the first spouse to die to "automatically" transfer to the surviving spouse, married couples enjoy a combined exemption of $10.98 million.  However to preserve the unused exemption amount, an estate tax return electing portability must be filed by the estate of the first spouse to die.

Accordingly, there are still many benefits to estate tax planning using trusts, especially for those who want to ensure that their estate tax exemption will be fully utilized by the surviving spouse.

Unfortunately taxes are subject to the political process and changes are inevitable.  Accordingly, individuals and married couples with estates expected to exceed $4 million should not ignore estate tax planning.


PLANNING oPPORTUNITIES--Annual Gift Tax Exclusion and Lifetime Gift Tax Exemption

The American Taxpayer Relief Act of 2012 (ATRA 2012) continues the concept of a unified exemption linking the gift tax and the estate tax.  Thus, to the extent one utilizes the credit against the unified gift and estate tax, while living, the federal estate tax exemption at death will be reduced accordingly.  The unified credit against gift and estate tax as indexed for inflation results in an exclusion amount of $5.49 million as of 2017.  Planning techniques taking advantage of the available exemption such as structuring ownership to avoid inclusion in a taxable estate and estate freezes to avoid gift or estate tax on subsequent increases in value are both a prudent and important aspect of comprehensive estate planning.

Other planning available focuses on use of gift tax exclusions.  The annual gift exclusion for 2017 is $14,000 allowing individuals to give away property each year free of either gift or estate taxes.  In other words, the annual gift exclusion amount does not consume the unified credit exemption available against gift and estate taxes.  Married couples, who properly elect "gift-splitting" on a gift tax return can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $28,000 to as many individuals as they choose each year even if the entire gift comes from only one spouse.


Generation-Skipping Transfer Tax/Exemption

Since property transferred from one generation to the second generation is subject to estate tax on first transfer and then again on the subsequent transfer the third generation, why not simply make transfers from the first generation to the third generation and skip a level of estate tax.  Transfers from one generation to another generation that is two or more generational levels below the transferring generation are known as generation-skipping transfers and are subject to the Generation-Skipping Transfer (GST) tax whether made during lifetime or at death.  A transfer from a grandparent to a grandchild or from an individual to another unrelated individual who is more than 37.5 years younger than the transferor are GST transfers.  The GST tax is 40 percent for transfers made after 2012.

Fortunately, individuals are entitled to a GST exemption amount which can be allocated among generation-skipping transfers.  The GST exemption amount available as of 2017 is $5.49 million.

Allocation of the GST exemption is complicated, and we recommend that anyone contemplating GST transfers should always consult with a competent professional in advance of making the transfers.



The American Taxpayer Relief Act of 2012 (ATRA 2012) made "permanent" a concept called "portability" ostensibly rendering traditional estate tax planning for married couples unnecessary. Portability of the federal estate tax exemption between married couples in simple terms means that if the first spouse dies and the value of the estate does not require the use all of the deceased spouse's federal exemption from estate taxes, then then the amount of the exemption that was not used for the deceased spouse's estate may be transferred to the surviving spouse's exemption for use by the surviving spouse in addition to the surviving spouses own exemption when the surviving spouse later dies.  However, to preserve the unused exemption amount, the Internal Revenue Code (“Code”) requires an executor to make an election on an estate tax return filed within the “time prescribed by law” (including extensions) for filing that return.  Accordingly, unless the surviving spouse timely files (within nine months of death) Form 709 Estate Tax Return, even though an Estate Tax Return may not otherwise be required, and complies with other requirements, “portability” may not be available.

Another issue arising from relying on “portability” prevents married couples from using the GST exemptions of both spouses.  Furthermore, blended families relying on "portability" may be faced with unintentional disinheritances and other unpleasant consequences.

If you are concerned about how your current estate and gift planning may function in light of ATRA 2012, and thereafter, we encourage you to schedule a consultation.


Arkansas AND STATE Estate Taxes

At one time, federal law allowed a credit against federal estate taxes due for the amount of state estate taxes paid.  To avoid the cost of administering a state estate tax, Arkansas, as well as many other states adopted an estate tax system commonly known as a "pick up" tax.  The Arkansas estate tax return simply requested as Arkansas estate tax the amount of the credit allowed for state estate taxes on the federal return.  When the federal credit for state estate taxes was eliminated, Arkansas repealed its estate tax.  Accordingly, at the present time, Arkansas has neither an estate tax (a tax paid by the estate) nor an inheritance tax (a tax paid by a recipient of a gift from an estate).

Although Arkansas does not have an estate or inheritance tax, if you own property in another state you should be aware of the taxes in such state.


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The attorneys of Ball Corley PLLC proudly serve the entire State of Arkansas with respect to:  Estate Planning (wills, trusts, powers of attorney, HIPAA authorizations, living wills and visitation directives); Elder Law (Medicaid, veterans administration pension and long term care planning); Probate; Trust and Estate Administration; Guardianships; Premarital Agreements; LGBT Laws; and Real Estate Transactions.

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