A bare-bones estate plan may include a simple last will, and perhaps a living will and durable powers of attorney. For some people, this can be sufficient, but there is a more comprehensive form of estate planning called legacy planning. It is particularly important for high net worth individuals that can be exposed to death taxes.
Federal Estate Tax
There is a federal estate tax in the United States that can significantly erode the legacy that you would like to pass along to the people that you love. This tax carries a very hefty 40 percent maximum rate.
The reason why it is only a factor for people that have accumulated a significant store of wealth is because there is a relatively high estate tax credit or exclusion. This is the amount that can be transferred before the estate tax would be applied on the remainder as it is being transferred to the heirs to the estate.
After a piece of tax legislation was signed into law, a $5 million exclusion was set in 2011. There were other tax changes over the ensuing years, but the base exclusion remained in place with adjustments to account for inflation. In 2017, the federal estate tax exclusion was $5.49 million.
When tax cuts were discussed during that year, there were those that wanted to repeal the estate tax entirely. This did not happen when an agreement was reached, but there was some good news for people that have death levy concerns. Under the terms of this new measure, the estate tax exclusion was raised to $11.18 million in 2018.
That is now the benchmark, and the 2019 inflation adjustment placed the exclusion at $11.4 million. It is allotted to each individual taxpayer, and as a result, a married couple would have $22.8 million to utilize between them. It is also important to note that the estate tax exclusion is portable.
To explain portability through a simple example, if you predecease your spouse, your spouse would have their own $11.4 million exclusion. However, because the estate tax exclusion is portable, the surviving spouse would also have your exclusion to add to his or her own. In other words, your exclusion would not die with you. This may seem like a no-brainer, but in fact, portability is a relatively new phenomenon.
Speaking of spouses, there is an unlimited marital estate tax deduction. This allows you to transfer unlimited assets to your spouse free of transfer taxes, but it is only allotted to American citizens. However, if you are married to a non-citizen, there is a widely embraced estate planning solution in the form of a qualified domestic trust.
Your spouse would be the primary beneficiary, and you would name secondary beneficiaries that would presumably be your children. While your surviving spouse is alive, they would be able to receive income from the trust’s earnings and utilize property that has been conveyed into the trust. The estate tax would not be applicable at that time.
After the passing of the first beneficiary, your children would inherit the assets in the trust. The estate tax would be a factor, but there would not be two instances of taxation eroding your legacy.
Federal Gift Tax
A logical thought that you would have after hearing about the existence of the federal estate tax would be to simply give lifetime gifts to the people that would be your heirs. This is not an option, because there is a federal gift tax in place that is unified with the estate tax. The $11.4 million exclusion is a unified exclusion that applies to large lifetime gifts along with the value of your estate.
Legacy Preservation Strategies
If you are faced with estate tax exposure, there are steps that you can take to preserve your legacy. There are irrevocable trusts that are typically utilized to gain estate tax efficiency. With this type of trust, you surrender incidents of ownership when you fund the vehicle. The assets are no longer part of your estate for tax purposes.
Trusts that can be used to facilitate transfers at a tax discount include generation-skipping trusts, grantor retained annuity trusts, qualified personal residence trusts, and charitable lead trusts, to name a few. Family limited partnerships can also facilitate discounted asset transfers among family members.
Attend a Free Seminar!
Our estate planning attorneys are holding a series of seminars over the coming weeks, and you can learn a lot if you attend one of the sessions. There is no admission charge, and you can visit our seminar page to see the schedule and obtain registration information.
- How Can an Incentive Trust Help Me Achieve My Estate Planning Goals? - September 4, 2023
- How Do I Prove Undue Influence in a California Will Contest? - September 2, 2023
- National Make-a-Will Month - September 1, 2023
