When you contemplate your estate plan, you probably focus on how you want your estate assets to be distributed after you are gone. While your estate plan certainly should provide a roadmap for the distribution of your estate assets, it should also protect those assets to ensure that Uncle Sam doesn’t get any more of them than is absolutely necessary. Toward that end, the Harrison asset protection attorneys at the Law Offices of Kobrick & Moccia discuss strategies aimed at protecting your estate from Uncle Sam.
How Much Will Your Estate Owe Uncle Sam?
One of the most potentially devastating threats to your estate assets is the federal gift and estate tax. The tax is effectively a tax on the transfer of wealth that is collected from a taxpayer’s estate after death. The tax applies to the value of all qualifying gifts made during the taxpayer’s lifetime as well as the value of all assets owned by the taxpayer at the time of death. The federal gift and estate tax rate fluctuated historically; however, the American Taxpayer Relief Act (ATRA) of 2012 permanently set the rate at 40 percent. That means that your estate could owe almost half of its value to Uncle Sam if you failed to plan ahead. To illustrate, imagine that you made qualifying gifts (almost all gifts are “qualifying gifts”) valued at $4 million over the course of your lifetime and left behind an estate valued at $12 million at the time of your death. Your estate would owe $6.4 million in federal gift and estate taxes absent any further action.
The 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. For 2019, the lifetime exemption amount would be about $5.5 million for an individual and $11 million for a married couple; however, President Trump signed tax legislation into law that changed the lifetime exemption amount for 2018 and for several years after that. Under the new law, the exemption amounts increased to $11.4 million for individuals and $22.8 million for married couples. 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. Taking the current lifetime exemption amounts into account, your $16 million estate would only owe $1.84 million in federal gift and estate taxes if your estate were to pay the tax this year.
Additional Tax Avoidance Strategies
Leaving your entire estate to a spouse avoids the tax on a temporary basis by using the unlimited marital deduction. The marital deduction allows you to leave an unlimited amount of assets to a spouse tax-free; however, relying exclusively on the deduction doesn’t work in the long run because it often over-funds your spouse’s estate. Consequently, you have only prolonged the payment to Uncle Sam until your spouse’s death. Under the current lifetime exemption guidelines, this strategy could be particularly risky given that the exemption limit is scheduled to be reduced back to its original amount in 2026.
The annual exclusion, however, is a tax avoidance tool that can significantly reduce the taxable value of your estate when implemented early on and used on an annual basis. The exclusion allows every taxpayer to make gifts of up to $15,000 to an unlimited number of beneficiaries tax-free. Moreover, gifts made using the annual exclusion don’t count toward your lifetime exemption. Imagine, for example, if you make annual gifts to eight beneficiaries for 20 years you could transfer $2.4 million tax-free. You can even make gifts to charities and/or to a trust using the annual exclusion.
Contact Harrison Asset Protection Attorneys
Please feel free to download our FREE estate planning worksheet. If you have additional questions or concerns regarding how to protect your estate assets from Uncle Sam, contact the Harrison asset protection attorneys at the Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.