Like many people, your primary motivation for creating an estate plan is probably to ensure that sufficient assets are passed down to your loved ones when you are gone so they do not have to struggle financially. You have likely gone to great lengths over the course of your lifetime to amass an estate that is large enough, and valuable enough, to have a something left for those loved ones after you are gone. Stockpiling assets may not be enough, however, if you fail to also include strategies for protecting those assets from the numerous and varied threats that exist once they become part of your estate. For example, failing to plan for the impact taxes will have on your estate could significantly diminish the value of your estate as the Londonderry asset protection attorneys at DeBruyckere Law Offices explain.
What Is the Federal Gift and Estate Tax?
The federal gift and estate tax is essentially a tax on the transfer of wealth that is collected upon the death of a taxpayer. The tax applies to both gifts made during a taxpayer’s lifetime and to assets gifted to a beneficiary at the time of the taxpayer’s death. 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 rate at 40 percent. This means that if you have a moderate to large estate, and you do nothing to limit the impact of federal gift and estate taxes on your estate, your estate could lose almost half of its value when you die because of estate taxes.
How Are Federal Gift and Estate Taxes Calculated?
To calculate what your estate will owe in federal gift and estate taxes you must first determine the value of any qualifying gifts you made during your lifetime. That total is then added to the total value of the estate you leave behind. Your estate, for the purpose of calculating taxes, consists of all assets owned by you at the time of death, including real and personal property as well as tangible and intangible assets. By way of illustration, assume that you made gifts during your lifetime valued at $3 million and that you leave behind an estate valued at $7 million at the time of your death. Before factoring in any deductions or tax avoidance strategies, your estate would owe federal gift and estate taxes on the combined total of $10 million, meaning your estate would owe $4 million in taxes! Because any federal gift and estate taxes that are due from your estate must be paid during the probate of your estate, that is basically like taking $4 million from your loved ones and handing it to Uncle Sam.
The Lifetime Exemption
Fortunately, every taxpayer is entitled to make use of the lifetime exemption before federal gift and estate taxes are imposed. Historically, the lifetime exemption amount fluctuated on a yearly basis as well; however, ATRA also permanently set the lifetime exemption amount at $5 million, adjusted annually for inflation. For 2017, the lifetime exemption amount is $5.49 million. In the example used above, using the lifetime exemption would reduce your taxable estate from $10 million to $4.51 million. Your estate would now owe $1,800,400 in federal gift and estate taxes instead of $4 million. While that is certainly a significant savings, the inclusion of tax avoidance strategies in your estate plan now could reduce your gift and estate tax bill even more by the time of your death.
Tax Avoidance Strategies – The Annual Exclusion
The annual exclusion is a tax avoidance strategy that can help you transfer a sizable portion of your wealth tax-free. Using the exclusion, you can make yearly gifts valued at up to $14,000 to an unlimited number of beneficiaries. The gifts are not taxed nor do they count toward your lifetime exemption limit. In the above example, assume you made the maximum gifts to your four children and six grandchildren each year for 10 years. You could transfer $140,000 a year tax-free for a total tax-free wealth transfer of $1.4 million at the end of the 10-year period. Your federal gift and estate tax bill would drop even further, to just $400,400 as a result of your use of the annual exclusion.
Contact Londonderry Asset Protection Attorneys
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about asset protection strategies within your estate plan, contact the experienced asset protection attorneys at DeBruyckere Law Offices by calling (603) 894-4141 or (978) 969-0331 to schedule an appointment.
Daniel DeBruyckere
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