When most people think about the need for an estate plan, they focus on the desire to control how their estate assets are handled after they are gone. While this certainly remains an important aspect of estate planning, a comprehensive estate plan should also protect those assets while you are alive so there are assets left to pass down when you are gone. Toward that end, it is imperative to recognize, and plan for, the various potential threats to your assets within your estate plan. For example, the Carmel asset protection attorneys at Frank & Kraft explain how estate taxes might threaten your assets and how you can combat that threat within your estate plan.
What You Need to Know about Federal Gift and Estate Taxes
Every estate is potentially subject to federal gift and estate taxes. The federal gift and estate tax is basically a tax on the transfer of wealth that is collected from your estate after you are gone and during the probate process. The tax applies to all qualifying gifts (just about every gift you make will be considered a “qualifying” gift) 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 $5 million in value. Your estate, at the time of your death, was valued at an additional $10 million. The combined total of $15 million would be subject to federal gift and estate taxes. Historically, the federal gift and estate tax rate fluctuated on a yearly basis. The American Taxpayer Relief Act of 2012 (ATRA), however, permanently set the rate at 40 percent. Without any deductions or adjustments, your $15 million estate would owe $6 million in federal gift and estate taxes.
2018 Changes to the Lifetime Exemption
Fortunately, there are ways to reduce your estate’s exposure to federal gift and estate taxes, starting with the lifetime exemption. Each taxpayer is entitled to utilize the lifetime exemption prior to calculating the amount of gift and estate taxes owed by the estate. ATRA set the lifetime exemption amount at $5 million, to be adjusted annually for inflation; however, President Trump signed tax legislation into law that changed the lifetime exemption amount for 2018 and for several years to come. For 2019, the exemption amount is increased to $11,400,000 for individuals and $22,800,000 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.
Using the current lifetime exemption, your $15 million estate would now only pay gift and estate taxes on $3.6 million, reducing the amount of federal gift and estate taxes to $1.44 million. While paying $1.44 million is undeniably preferable to paying $6 million, there are estate planning tools and strategies that you may be able to use to reduce your estate tax obligation even further.
Combatting the Tax Threat
One of the many benefits to early, and comprehensive, estate planning is the ability to reduce your taxable estate. One commonly used estate planning tool that can help accomplish this goal is the annual exclusion. The exclusion allows each taxpayer to make annual gifts valued at up to $15,000 (for 2019) 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. By way of illustration, imagine that you and your spouse started using the annual exclusion this year by making gifts to your two adult children and four grandchildren. This year alone you are able to transfer $180,000 ($30,000 x 6 = $180,00) in assets tax-free. If you were to make those gifts for the next ten years, you and your spouse could pass down $1.8 million in assets without those gifts counting against your lifetime exemption. Keep in mind that making gifts to a trust may also qualify for the yearly exemption.
Contact Carmel Asset Protection Attorneys
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about protecting your assets from threats, contact the experienced Carmel asset protection attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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