Creating a successful estate plan requires you to consider a wide range of factors that may impact you, your assets, and/or your plan at some point over the course of your lifetime. One of the most important of those factors is taxes. In fact, failing to consider the impact that gift and estate taxes may have on your estate plan can be a fatal flaw. Given the highly individualistic nature of estate planning, you will need to consult with an experienced estate planning attorney to determine precisely how your estate will be affected by gift and estate taxes. In the meantime, however, the Beverly estate planning attorneys at DeBruyckere Law Offices explain what gift and estate taxes are and how they might impact your estate.
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 paid at the time of death. Shortly after your death, your estate will go through the legal process known as probate. During the probate process, your estate assets will be identified and valued. Gift and estate taxes may be imposed on the value of your estate assets combined with the value of all lifetime gifts made y you prior to your death. For example, if your estate assets are worth $7 million and you made qualifying gifts while alive valued at $5 million, your taxable estate for federal gift and estate tax purposes would be $12 million.
Historically, the federal gift and estate tax rate fluctuated on a regular basis; however, the American Taxpayer Relief Act of 2012 (ATRA) permanently set the tax rate at 40 percent. Absent any additional adjustments, your estate would owe a staggering $4.8 million in federal gift and estate taxes!
The Lifetime Exemption
Fortunately, there is an important adjustment to be made prior to calculating your estate’s tax obligation. Every taxpayer is entitled to deduct the current lifetime exemption amount from their estate before calculating any tax debt. ATRA also set the lifetime exemption amount at $5 million, adjusted annually for inflation. For 2017, the exemption is $5.49 million, bringing your taxable estate in our example down to $6.51 million. That adjustment, in turn, brings the federal gift and estate tax obligation down to $2,604,000.
What Is Portability?
Another important goal accomplished by ATRA was making the concept of portability permanent. Portability refers to the ability of a surviving spouse to use any unused portion of a deceased spouse’s lifetime exemption amount. By way of illustration, let’s assume that in our example above your spouse pre-deceased you. At the time of his/her death, the unlimited marital deduction was used to transfer all of his/her estate to you. Because your spouse only made $2 million in lifetime gifts, he/she only used $2 million of the allowable lifetime exemption of $5.49 million. As such, $3.49 million out of your spouse’s lifetime exemption was not used and was, therefore, “ported” over to you. Therefore, at the time of your death, your estate may use both your lifetime exemption of $5.49 million and the leftover $3.49 million from your spouse’s exemption that was “ported” over to you, resulting in a total exemption amount of $8.98 million. Consequently, your taxable estate is reduced to just $3.02 million, bringing your federal gift and estate tax obligation down to $1,208,000.
State Gift and Estate Taxes
Along with the impact federal gift and estate taxes will have on your estate, you may also need to take into account state gift and estate taxes. Several states, including Massachusetts, impose a state level gift and estate tax. New Hampshire repealed its state “legacy and succession” tax effective for deaths occurring after January 1, 2003. It is imperative to take state taxation into account because the exemption amount is frequently much less than the federal exemption, increasing the likelihood of an estate incurring a tax obligation. In Massachusetts, for instance, the exemption is only $1 million and does not change each year like its federal counterpart. The tax rate is a graduated rate ranging from 0.8 percent to 0.16 percent.
Contact Beverly Estate Planning Attorneys
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about federal and/or state gift and estate taxes, contact the experienced estate planning attorneys at DeBruyckere Law Offices by calling (603) 894-4141 or (978) 969-0331 to schedule an appointment.