A well drafted estate plan should accomplish a number of different goals and objectives, including creating a blueprint for the transfer of your estate assets to your intended beneficiaries when you die. Those assets, in turn, are intended to help provide for your beneficiaries long after you are no longer here to provide for them yourself. Undoubtedly, your intention is to pass down as large of an estate as possible to your loved ones — the more valuable the better. In order to ensure that you maximize the value of the assets passed down to loved ones, however, you must take into account the impact federal gift and estate taxes will have on your estate. Failing to understand, and account for, gift and estate taxes could result in the value of your estate being considerably diminished before it ever gets passed down to your loved ones.
What Are Federal Gift and Estate Taxes?
In the United States, almost everything is potentially subject to taxation by the local, state, and/or federal government. The federal gift and estate tax is one of those opportunities to impose a tax. In this case, it is essentially a tax on the transfer of wealth. Because wealthy families traditionally found ways to keep the wealth in the family without subjecting it to taxation, the gift and estate tax evolved as a way to ensure that all transfers of wealth, including gifts made during your lifetime, are taxed at the time of death.
How Are Gift and Estate Taxes Calculated?
At the time of your death, everything you own, or in which you have an ownership interest, will become part of your estate. This includes both real and personal property as well as tangible and intangible assets. In addition, the value of any qualifying gifts you made during your lifetime must be calculated. Although there are some exceptions, assume that all gifts you made are “qualifying” gifts. The total of your assets owned at the time of your death, combined with lifetime gifts, is then potentially subject to federal gift and estate taxes at the tax rate of 40 percent. By way of illustration, assume you owned assets valued at $8 million when you died, and made gifts valued at $4 million over the course of your lifetime, the combined total of $12 million could be subject to gift and estate taxes, meaning your estate would owe $4.8 million in taxes.
The Lifetime Exemption
Each taxpayer, however, is entitled to exempt up to the “lifetime exemption limit” before the tax is actually levied. Thanks to the American Taxpayer Relief Act (ATRA) of 2012, the lifetime exemption limit was permanently set at $5 million, adjusted annually for inflation. For 2016, the limit is $5.45 million. Therefore, for the year 2016, only the value of estate assets and lifetime gifts valued at over $5.45 million will be taxed. Using the example above, after deducting the lifetime exemption we are left with $6.55 million in taxable assets. That drops the estate tax bill from $4.8 million to $2.62 million.
The Importance of Tax Avoidance Strategies in Your Estate Plan
The lifetime Exemption is something that automatically applies to every taxpayer; however, if there is even a chance that your estate will be valued above the lifetime exemption amount you will need to be proactive in lowering your estate tax obligation. This means including tax avoidance strategies and tools in your overall estate plan to limit the impact federal (and in some cases state) gift and estate taxes will have on your estate. In our example above, giving away $2.62 million to Uncle Sam seems foolish when it was likely not necessary. Using the yearly exclusion, for example, allows you to make gifts valued at up to $14,000 to an unlimited number of beneficiaries every year tax-free. When implemented early on, this single tool can result in the transfer of a significant amount of assets that would otherwise be subject to estate taxes. The key is to start early on working with your New York estate planning attorney to ensure that estate taxes do not diminish the value of your estate.
If you have any additional questions or concerns regarding your estate taxes, please contact the experienced New York estate planning attorneys at The Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.