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Several strategies can help minimize gift and estate taxes, including:
- Annual Gift Exclusion: Take advantage of the annual gift exclusion to transfer wealth without incurring tax.
- Lifetime Exemption: Utilize the lifetime exemption to make larger gifts.
- Marital Deduction: Transfer assets to a spouse, as these transfers are generally tax-free.
- Charitable Contributions: Make donations to qualified charities to reduce the taxable estate.
- Family Limited Partnerships (FLPs): By gifting limited partnership interests, you can gradually transfer wealth to heirs while minimizing gift and estate taxes.
- Trusts: Establish trusts (e.g., irrevocable life insurance trusts, charitable remainder trusts) to manage and reduce estate taxes.
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For federal gift tax, you must file IRS Form 709, “United States Gift (and Generation-Skipping Transfer) Tax Return,” by April 15th of the year following the gift. For federal estate tax, you must file IRS Form 706, “United States Estate (and Generation-Skipping Transfer) Tax Return,” within nine months of the decedent’s death. Extensions may be requested if needed.
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No, Indiana does not impose a state-level gift and/or estate tax. Indiana residents are only subject to federal gift tax regulations.
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Yes. Generally, gifts to your spouse, to a qualified charity, or tuition or medical expenses paid directly to an educational or medical institution on behalf of someone else are tax-free gifts.
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ATRA also made the concept of portability permanent. Portability refers to a surviving spouse’s ability to use any unused portion of a deceased spouse’s lifetime exemption. If your spouse passed away in 2024, for example, and only used $5 million of his/her lifetime exemption, the remaining $8.61 million would “port” over to you, meaning you can add it to your $13.61 lifetime exemption.
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The unlimited marital deduction allows you to transfer an unlimited amount of assets to your spouse without incurring gift or estate taxes, provided your spouse is a U.S. citizen. While this can reduce your taxable estate, it can over-fund your spouse’s estate because it effectively only defers taxes until the second spouse’s death. Moreover, the unlimited marital deduction does not apply if your spouse is a non-citizen. In that case, you can only transfer $185,000 (as of 2024) tax-free.
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The annual exclusion allows you to gift up to $18,000 (as of 2024) in assets to an unlimited number of beneficiaries each year tax-free. Gifts made using the annual exclusion do not count toward your lifetime exemption limit. To put the value of the annual exclusion in perspective, you could transfer $180,000 to 10 beneficiaries tax-free each year. Over the course of a decade, you could transfer $1.8 million without using any of your lifetime exemption.
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Each taxpayer is entitled to utilize the lifetime exemption to reduce the amount of taxes owed. The lifetime exemption also changed from year to year until ATRA set the lifetime exemption amount at $5 million, to be adjusted annually for inflation. In 2018, however, the Tax Cuts and Jobs Act (TCJA) went into effect and increased the lifetime exemption amount for 2018 and for several years thereafter. For 2024, the individual lifetime exemption amount is $13.61 million, meaning a married couple can shield a total of $27.22 million from federal gift and estate taxes. To put those figures in perspective, that same $22 million estate would only pay gift and estate taxes on $8.39 million after deducting the lifetime exemption, reducing the tax liability from $8.8 million to $3,356,000, a savings of over $5 million.
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Historically, the federal gift and estate tax rate was subject to change and frequently did change. The American Taxpayer Relief Act of 2012 (ATRA), however, permanently set the rate at 40 percent. To illustrate how the tax works, imagine you made gifts during your lifetime totaling $7 million in value and your estate at the time of your death is valued at an additional $15 million. The combined total of $22 million would be subject to federal gift and estate taxes. Without any deductions or adjustments, your estate would owe a staggering $8.8 million to Uncle Sam in federal gift and estate taxes.
Contact Us
If you have additional questions, contact an experienced Indianapolis, Indiana elder law attorney at Frank & Kraft. by calling (317) 684-1100 to schedule your appointment today.
