Creating a successful estate plan requires you to consider much more than just the division of your estate assets when you are gone. Protecting those assets up to the point when they are passed down to loved ones, for example, should be a primary estate planning objective in every estate plan. That requires you to consider – and ultimately reduce — the impact gift and estate taxes will have on your estate at the time of your death. Toward that end, the Grand Forks estate planning attorneys at German Law explain four ways to reduce your estate’s exposure to federal gift and estate taxes.
What Is the Federal Gift and Estate Tax?
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.
4 Ways to Reduce Your Estate Taxes
To prevent leaving your estate vulnerable to gift and estate taxes you must plan accordingly within your estate plan. Four commonly used estate planning strategies that can help you limit your estate’s exposure to gift and estate taxes, include:
- Lifetime Gifting. One of the easiest ways to limit your estate’s exposure to estate taxes is to transfer as much of your wealth as possible during your lifetime. Doing so can greatly reduce the value of your probate estate which, in turn, lowers (or eliminates) your tax burden. You must consult with an estate planning attorney, however, to make sure that your gifts are not included in your taxable estate.
- 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. In 2018, however, President Trump signed tax legislation into law that changed the lifetime exemption amount for that year and for several years thereafter (until 2026). Gift and estate taxes are only calculated on the value of your estate that exceeds the current lifetime exemption amount.
- Yearly Exclusion. The exclusion allows each taxpayer to make annual gifts valued at up to $15,000 (for 2021) 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. Over the course of a few years, you could transfer a noticeable amount of your estate assets if you plan carefully.
- Asset Protection Trust. Trusts have evolved to the point where there is a trust to help achieve almost any estate planning goals. There are several trusts that are designed to help protect your assets. All those trusts begin as an irrevocable living trust. The reason for this is that the law views the assets in such a trust as belonging to the trust once they are transferred into the trust. Consequently, those assets are not included in your estate for purposes of calculating federal gift and estate taxes.
Contact a Grand Forks Estate Planning Attorney
Please join us for an upcoming FREE seminar. If you have additional questions or concerns about how to reduce your estate’s exposure to federal gift and estate taxes, contact a Grand Forks estate planning attorney at German Law by calling 701-738-0060 to schedule an appointment.