One of the primary reasons for creating an estate plan is to ensure that the assets you accumulate over the course of your lifetime are distributed according to your wishes after you are gone. To have assets left to pass down, however, you must protect against any threats to your assets. As we will discuss below, you should know how estate taxes can threaten your assets.
The Federal Gift and Estate Tax
The federal gift and estate tax is effectively a tax on the transfer of wealth that is collected from your estate during the probate of your estate. Every taxpayer is subject to federal gift and estate taxes. The tax applies to all qualifying gifts (almost all gifts are considered “qualifying” gifts) made during a taxpayer’s lifetime as well as all estate assets owned by the taxpayer at the time of death. To illustrate how the tax works, imagine you made gifts during your lifetime totaling $5 million in value. Your estate, at the time of your death, was valued at an additional $10 million. The combined total of $15 million would be subject to federal gift and estate taxes. Historically, the federal gift and estate tax rate was subject to change – and did change on a regular basis. The American Taxpayer Relief Act of 2012 (ATRA), however, permanently set the rate at 40 percent. Without any deductions or adjustments, that $15 million estate would owe $6 million in federal gift and estate taxes.
2018 Changes to the Lifetime Exemption
The good news is that each taxpayer is entitled to factor in the lifetime exemption prior to calculating the amount of gift and estate taxes owed to Uncle Sam. ATRA set the lifetime exemption amount at $5 million, to be adjusted annually for inflation. For 2018, the lifetime exemption amount would be $5.49 million for an individual and $10,980,000 for a married couple; however, President Trump signed tax legislation into law that changed the lifetime exemption amount for 2018 and for several years to come. Under the new law, the exemption amounts increased to $11,200,000 for individuals and $22,400,000 for married couples. These exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation, unless extended by Congress by a new tax law. Consequently, that same $15 million estate would now only pay gift and estate taxes on $3.8 million, reducing the amount of federal gift and estate taxes to $1,520,000.
Planning for the Impact of Estate Taxes
Knowing the impact estate taxes can have on your estate assets, planning ahead becomes essential. One way to do that is to make use of the annual exclusion that allows you to make yearly gifts valued at up to $15,000 to an unlimited number of beneficiaries without those gifts counting against your lifetime exemption. Gifting to six beneficiaries for just ten years allows you to transfer an amazing $900,000 tax-free. The more beneficiaries you gift to, and the early you start making use of the annual exclusion, the more of your wealth you can transfer to loved ones without paying estate taxes on the transfer. If you are married, you can use the gift-splitting option that allows you to combine your exemptions and transfer assets valued at up to $30,000 per beneficiary, per year. In addition, there are a variety of specialized trusts that can help you protect your assets. Consult with an experienced and qualified estate planning attorney to decide which asset protection tools and strategies work best in your plan.
Contact Us for Asset Protection Planning
Please download our FREE estate planning checklist. If you have additional questions or concerns regarding the impact estate taxes will have on your assets, contact us at the Northern California Center for Estate Planning & Elder Law today by calling (916)-437-3500 or by filling out our online contact form.