Many of our clients would agree that paying estate taxes is one of their major concerns in estate planning. There is no Nevada estate tax, but that is not the case in every state. So, it is important to check with your state revenue department to be sure if you are not a Nevada resident. However, there is a federal estate tax which is currently 40 percent of every gross estate that exceeds $5.45 million, as of 2016. Since there is an estate tax exclusion for estates the value of which is less than $5.45 million, most estates are not required to pay estate taxes. On the other hand, if your estate is not exempt, you will want to explore ways to avoid estate tax.
Federal estate taxes have been imposed since 1916. In response to the imposition of estate taxes, many citizens began transferring their assets to their children, grandchildren and others, in an effort to reduce their taxable estate. As a result, the government created the gift tax in order to stop estate tax avoidance. In 1976, the estate tax and gift tax were combined.
In 1997, the estate tax exemption was only $600,000. In 2008, the estate tax exemption increased to $2,000,000. Currently, in 2016, the estate tax exemption is $5.45 million. This exemption, coupled with the gift tax exclusion, makes it much simpler for most estates to avoid estate tax entirely.
With these two exemptions combined, you can either leave or give away up to $5.45 million in estate property, without any estate or gift tax being imposed on those transfers. As long as your estate is worth less than the exemption amount, you can avoid federal estate taxes completely. The annual gift tax exclusion is $14,000 per recipient for each individual or a total of $28,000 per recipient, if married couples combine their individual exclusions. If you exceed the $5.45 million lifetime exclusion amount (or unified credit), then your estate will be assessed taxes in the amount of 40 percent, but only on the excess amount.
This lifetime exclusion or credit is also “portable" for spouses, which means that if the full exclusion amount is not used with the first spouse's estate, then the surviving spouse can benefit from the remainder of that exemption. For instance, if your estate is worth $2 million when you die, your surviving spouse will be able to use the remaining $3.45 million towards his or her estate.
For those who are married, there is yet another way to avoid paying estate taxes. You can take advantage of the unlimited marital deduction, which allows you to leave all of your state to your spouse, tax free. No estate taxes will be imposed on those assets upon your death. Instead, the taxes would be due only upon the surviving spouse's death. This marital deduction is unlimited, so you can essentially leave all of your property to your spouse tax-free.
It is important to remember that not every trust can help you to avoid estate taxes. In particular, a living trust will not eliminate taxes for the simple fact that you maintain the ability to amend or revoke the living trust at any time. Estate taxes can only be avoided if the assets are essentially removed from your estate. Since you can take back your assets at any time with a living trust, you are still considered to own those assets. For that reason, federal tax laws include living trust assets in your estate for the purpose of estate taxes.
A “generation-skipping trust” is basically a second-generation “bypass trust.” The gift of the income created by the trust property is separate from the gift of the property itself. Therefore, you can include provisions in the trust that a specific amount of property will be transferred to your grandchildren, while the income from that property will be distributed to one or both of their parents. This type of trust can be set up for a specified length of time, or until the parents' death. After the death of the parents, the grandchildren would then collect the income from those assets and also gain control over the assets themselves.
If you have questions regarding estate tax, or any other estate planning issues, please contact Anderson, Dorn & Rader, Ltd. for a consultation, either online or by calling us at (775) 823-9455.