Like most people, the primary goal of your estate plan is probably to protect and grow your estate assets and ensure that they are passed down to your loved ones after you are gone. To maximize the benefits of your estate plan, you must consider the impact that federal gift and estate taxes will have on your estate when creating your estate plan. Failing to do so could result in the loss of a significant portion of your assets before they can be passed down to your loved ones. To help you understand the importance of the tax, the Hauppauge estate planning attorneys at the Law Offices of Kobrick & Moccia explain federal gift and estate taxes and how the tax might affect your estate plan.
What Is the Federal Gift and Estate Tax?
The federal gift and estate tax is effectively a tax on the transfer of wealth that is paid at the time of death. Shortly after your death, your estate will go through the legal process known as probate. During the probate process, your estate assets will be identified and valued. Gift and estate taxes may be imposed on the value of your estate assets combined with the value of all lifetime gifts made y you prior to your death. For example, if your estate assets are worth $5 million and you made qualifying gifts while alive valued at $5 million, your taxable estate for federal gift and estate tax purposes would be $10 million.
Historically, the federal gift and estate tax rate fluctuated on a regular basis; however, the American Taxpayer Relief Act of 2012 (ATRA) permanently set the tax rate at 40 percent. Absent any additional adjustments, your estate would owe a staggering $4.0 million in federal gift and estate taxes – seriously diminishing the estate left over to pass down to your loved ones.
The Lifetime Exemption
Fortunately, there are adjustments and deductions that might help reduce your estate’s tax obligation. Every taxpayer is entitled to make use of the lifetime exemption which is essentially a deduction taken prior to calculating the tax. Historically, the lifetime exemption limit fluctuated on a regular basis prior to the passage of the ATRA. In 2012, ATRA set the lifetime exemption limit at $5 million, to be adjusted annually for inflation. For 2018, the exemption is $5.6 million. This means that every taxpayer may deduct $5.6 million from their taxable estate before federal gift and estate taxes are levied on the estate. Using the example above of a $10 taxable estate, it will be reduced to $4.4 million after deducting the lifetime exemption for the purpose of calculating your gift and estate taxes due. Consequently, your estate would owe $1,760,000 in federal gift and estate tax instead of $4 million.
What Is Portability and Can It Help?
Another important goal accomplished by ATRA was making the concept of portability permanent. Portability refers to the ability of a surviving spouse to use any unused portion of a deceased spouse’s lifetime exemption amount. By way of illustration, let’s assume that in our example above your spouse pre-deceased you. At the time of his/her death, the unlimited marital deduction was used to transfer all of his/her estate to you. Because your spouse only made $2 million in lifetime gifts, he/she only used $2 million of the allowable lifetime exemption of $5.6 million. As such, $3.6 million out of your spouse’s lifetime exemption was not used and was, therefore, “ported” over to you. Therefore, at the time of your death, your estate may use both your lifetime exemption of $5.6 million and the leftover $3.6 million from your spouse’s exemption that was “ported” over to you, resulting in a total exemption amount of $9.2 million available for your use at the time of your death. As such, your $10 estate is now reduced to a taxable estate of just $800,000, bringing your federal gift and estate tax obligation down to $320,000.
Contact Hauppauge Estate Planning Attorneys
For more information, please download our FREE estate planning worksheet. If you have questions or concerns relating to federal gift and estate taxes, contact the estate planning attorneys at the Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.