Protecting your estate assets to ensure they are available to pass down at the end of your life should be an important consideration in any comprehensive estate plan. One of the biggest potential threats to your estate assets occurs just after your death in the form of federal gift and estate assets. An Indianapolis estate planning attorney at Frank & Kraft federal gift and estate assets for those who are unfamiliar with how the tax is levied and collected.
What Happens after Your Death?
When you die, your estate will likely need to go through the legal process known as probate. Probate is required to accomplish several important goals, including identifying your estate assets, valuing those assets, and eventually transferring them to the new owners at the end of the probate process. Another function of probate is to ensure that creditors of the estate are notified of the estate owner’s death and given the opportunity to file claims against the estate. Although Uncle Sam is not required to file a claim, any federal gift and estate taxes owed to the government must be paid before other claims are paid and certainly before any assets are transferred to the estate beneficiaries and/or heirs.
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 collected at the time of your death. The tax rate fluctuated in the past; however, the American Taxpayer Relief Act of 2012 (ATRA) permanently fixed the gift and estate tax rate at 40 percent. The tax is levied on both gifts made during your lifetime and the value of assets you own at the time of your death.
Will Your Estate Owe Federal Gift and Estate Taxes?
Whether or not your estate will incur a federal gift and estate tax debt depends primarily on the value of your estate at the time of death coupled with the value of any qualifying lifetime gifts you made prior to your death. Fortunately, all taxpayers are entitled to make use of the “lifetime exemption.” The lifetime exemption also fluctuated prior to the passage of ATRA which set the exemption at $5 million to be adjusted annually for inflation; however, changes were made to the federal gift and estate tax by President Trump that temporarily raised the lifetime exemption amount through 2025. In 2026, the lifetime exemption amount is scheduled to return to the previous amount of $5 million adjusted for inflation.
Reducing Your Tax Liability
If you are not too keen on giving the government a sizeable chunk of your estate after your death, the good news is that there are numerous tax avoidance tools and strategies that can be included in your estate plan to help reduce your estate’s exposure to federal gift and estate taxes. 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 does not work in the long run because it often over-funds your spouse’s estate. Consequently, you have only prolonged the payment until your spouse’s death. A strategy that does work involves incorporating the annual exclusion into your estate plan. The exclusion allows you to make gifts of up to $15,000 ($30,000 if you are married and you both use your annual exclusion) to an unlimited number of beneficiaries each year tax-free. Gifts made using the annual exclusion do not count toward your lifetime exemption.
Contact An Indianapolis Estate Planning Attorney
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns regarding estate taxes, contact the experienced Indianapolis estate planning attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.