If you are fortunate enough to have a moderate to large estate, one of the most important factors to consider when creating your estate plan is the impact federal (and in some cases state) gift and estate taxes will have on your estate. Failing to plan for the possibility that your estate could owe estate taxes could dramatically reduce the value of the estate you pass down to loved ones after you are gone. With that in mind, the Grand Forks estate planning lawyers at German Law discuss recent changes to the lifetime exemption used when calculating federal gift and estate taxes.
The Federal Gift and Estate Tax
The federal gift and estate tax is effectively a tax on the transfer of wealth that is collected from your estate during the probate of your estate. Every taxpayer is subject to federal gift and estate taxes. The tax applies to all qualifying gifts (almost all gifts are considered “qualifying” gifts) made during a taxpayer’s lifetime as well as all estate assets owned by the taxpayer at the time of death. To illustrate how the tax works, imagine you made gifts during your lifetime totaling $6 million in value. Your estate, at the time of your death, was valued at $10 million. The combined total of $16 million would be subject to federal gift and estate taxes. Historically, the federal gift and estate tax rate was subject to change – and did change on a regular basis. The American Taxpayer Relief Act of 2012 (ATRA), however, permanently set the rate at 40 percent. Without any deductions or adjustments, that $16 million estate would owe $6.4 million in federal gift and estate taxes.
2018 Changes to the Lifetime Exemption
The good news is that each taxpayer is entitled to factor in the lifetime exemption prior to calculating the amount of gift and estate taxes owed to Uncle Sam. ATRA set the lifetime exemption amount at $5 million, to be adjusted annually for inflation. For 2018, the lifetime exemption amount would be $5.49 million for an individual and $10,980,000 for a married couple; however, President Trump 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 $11,200,000 for individuals and $22,400,000 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. Consequently, that same $16 million estate would now only pay gift and estate taxes on $6.8 million, reducing the amount of federal gift and estate taxes to $1,920,000.
How Do the 2018 Changes Impact Your Estate Plan?
If you currently have an estate that would be subject to federal gift and estate taxes under the previous lifetime exemption law, the temporary increase in the lifetime exemption amount may present an opportunity to transfer more of your wealth without incurring taxes over the next few years. Because estate planning is very personal, and because the gift and estate laws are subject to change, it is imperative that you consult with your estate planning attorney to decide how best to make use of the increase in the lifetime exemption.
Tax Avoidance Tools and Strategies
Along with taking advantage of the recent change to the lifetime exemption, you may wish to also incorporate additional tax avoidance tools and strategies into your estate plan. For example, you might make use of the annual exclusion. The exclusion allows each taxpayer to make annual gifts valued at up to $15,000 (for 2018) to an unlimited number of beneficiaries without those gifts counting toward your lifetime exemption. Married couples can combine their exclusion and make gifts valued at up to $30,000. Imagine that you and your spouse made yearly gifts to six beneficiaries. You could transfer $180,000 each year tax-free. Now assume you made those gifts each year for just ten years. You will have transferred $1.8 million without using any of your lifetime exemption limit. The $1,920,000 tax obligation from the above example would be reduced to just $120,000!
Contact Grand Forks Estate Planning Lawyers
Please join us for an upcoming FREE seminar. If you wish to discuss how you can limit your estate’s exposure to federal gift and estate taxes, contact the estate planning lawyers at German Law by calling 701-738-0060 to schedule an appointment.