Although decisions related to the division of your estate assets after you are gone will likely be a primary consideration in your estate plan, a comprehensive estate plan will include additional goals. Protecting those assets up to the point when they are passed down to loved ones, for example, should be a primary estate planning objective in every estate plan. That requires you to consider – and ultimately reduce — the impact gift and estate taxes will have on your estate at the time of your death. Toward that end, we’ll explain four of the top gift and estate tax avoidance strategies.
What Is the Federal Gift and Estate Tax?
The federal gift and estate tax is essentially a tax on the transfer of wealth. Both transfers made during a taxpayer’s lifetime in the form of a gift and transfers made at the time of death in the form of an inheritance are subject to the tax. Historically, the estate tax rate fluctuated on a yearly basis; however, with the passage of the American Taxpayer Relief Act of 2012 (ATRA) the tax rate was permanently set at 40 percent. That means that absent any deductions or adjustments to your estate’s value, you could lose 40 percent of that value to federal gift and estate taxes.
4 Ways to Reduce Estate Taxes
No one wants to leave their estate vulnerable to gift and estate taxes; however, you must plan ahead to avoid doing just that. The good news is that there are several estate planning strategies that can help you limit your estate’s exposure to gift and estate taxes, including:
- Lifetime gifting – one of the easiest ways to limit your estate’s exposure to estate taxes is to transfer as much of your wealth as possible during your lifetime. Doing so can greatly reduce the value of your probate estate which, in turn, lowers (or eliminates) your tax burden. You must consult with an estate planning attorney, however, to make sure that your gifts are not included in your taxable estate.
- Lifetime exemption – every taxpayer is entitled to make use of the lifetime exemption to reduce the amount of gift and estate taxes owed by their estate. ATRA set the lifetime exemption amount at $5 million, to be adjusted for inflation each year. In 2018, however, a new tax law changed the lifetime exemption amount for that year and for several years thereafter. Gift and estate taxes are only calculated on the value of your estate that exceeds the current lifetime exemption amount.
- Annual exclusion –the exclusion allows each taxpayer to make annual gifts valued at up to $15,000 (for 2020) to an unlimited number of beneficiaries without those gifts counting toward your lifetime exemption. Married couples can combine their exclusion and make gifts valued at up to $30,000. Over the course of a few years you could transfer a noticeable amount of your estate assets if you plan ahead.
- Asset protection trust – trusts have evolved to the point where there is a trust to help achieve almost any estate planning goals. There are several trusts that are designed to help protect your assets. All those trusts begin as an irrevocable living trust. The reason for this is that the law views the assets in such a trust as belonging to the trust once they are transferred into the trust. Consequently, those assets are not included in your estate for purposes of calculating federal gift and estate taxes.
Please download our FREE estate planning checklist. If you have additional questions or concerns about how to reduce your estate’s exposure to gift and estate taxes, contact us at the Northern California Center for Estate Planning & Elder Lawby calling (916)-437-3500 or by filling out our online contact form.
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