For many people, a successful estate plan must limit exposure to federal and/or state gift and estate taxes. Failing to incorporate tax avoidance strategies could cost an estate a substantial amount of money. One of those strategies will likely include making use of the yearly exclusion. A Hauppauge estate planning attorney at the Law Offices of Kobrick & Moccia asks “Are you making use of the yearly exclusion?”
Understanding Federal Gift and Estate Taxes
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.
Calculating the Federal Gift and Estate Tax
The federal gift and estate tax is levied on the combined value of all qualifying gifts made during your lifetime and the value of all estate assets owned at the time of your death. For example, imagine that you made gifts to children and other loved ones during your lifetime worth a combined total of $3 million. At the time of your death, you owned assets with a total value of $12 million. The combined total of $15 million would potentially be subject to federal gift and estate taxes. Without any further adjustments, your estate would lose a staggering $6 million to federal gift and estate taxes!
The Lifetime Exemption
Each 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. President Trump, however, 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 $11.58 million for individuals and $23.16 million for married couples for 2020. 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. That $15 million estate would only be taxed on the amount over the lifetime exemption amount, or $3.42 million. That still means that the estate would lose almost $1.4 million in estate taxes.
The Yearly Exclusion
Using the lifetime exemption significantly reduces your estate’s exposure to federal gift and estate taxes; however, there are additional tax avoidance strategies that can reduce your tax debt even more if incorporated into your estate plan far enough ahead of time. For instance, the yearly exclusion, also referred to as the annual exclusion, can help you transfer a sizable portion of your wealth tax-free. Using the exclusion, you can make yearly gifts valued at up to $15,000 to an unlimited number of beneficiaries without those gifts counting toward your lifetime exemption limit. In the above example, assume you made the maximum gifts to your four children each year for 15 year. You could transfer $60,000 a year tax-free for a total tax-free wealth transfer of $900,000 at the end of the 15-year period. You could save your estate $360,000 in taxes and enjoy the benefit of making gifts to your loved ones while you are still around to see them enjoy the gifts.
Contact a Hauppauge Estate Planning Attorney
Please feel free to download our FREE estate planning worksheet. If you have additional questions or concerns about the yearly exclusion, or gift and estate taxes in general, contact a Hauppauge estate planning attorney at the Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.