In the attempt to progress towards a modern US tax system, the Biden administration has proposed a number of changes to the current tax code. According to a publication released by the U.S. Treasury early this year, they hope to push these changes through Congress which is necessary to gain approval for the amendments. It’s true that many Americans are divided on the best methods for stimulating the US economy, however, one fact remains undoubtable - careful estate and tax planning is crucial for the wealth and financial security of American families.
The Greenbook, a publication that provides information regarding the Administration’s revenue proposals, details the proposed changes which will ultimately impact estate planning in numerous ways. Many of the effective estate planning strategies that have been diligently defined by professionals in the industry for decades may be discarded. However, this could also enhance certain processes in estate planning by implementing other key strategies.
Notably, the reduction of estate and gift tax exemption amounts is absent from the list of proposals. While it’s possible that this could change in the future, we know that for now, these tax exemptions remain extremely high. It’s important to understand the law as it is written today so that you can make appropriate decisions with your assets and prepare for other coming changes.
As it stands today, the estate tax laws that were passed under the Trump administration will expire and reset to the prior laws starting in 2026. If there is no action made by Congress to change this, the reset will restore the estate and gift tax exemption amount to $5 million, as it was in 2016. However, the rate of inflation must also be included in this amount which brings the total to roughly $6.6 million by 2026.
With this information in mind, it’s crucial that you do all you can now to determine the expected return on your investments for the future. To do this, you should consider the average rates of return on your current investments, compounded annually. Many people have found that a healthy return of 7% annually could double one’s net worth in just 10 to 12 years. However, if estate tax exemption amounts are reduced by roughly 50% and continue to increase with the inflation rate, you risk having to pay significantly high estate tax rates.
It can be difficult to prepare for the uncertainties that may affect your tax and estate planning strategies. Without knowing what the future holds, how do you determine the best way to protect your assets? To make a more accurate decision, some of the other Greenbook proposals should also be considered, such as:
These changes haven’t been approved yet by Congress, but their consideration could help sway your strategic plans. The following strategies are still effective tools under current tax law, and implementing them now could provide significant tax savings.
A grantor retained annuity trust (GRAT) is an estate planning strategy that allows the grantor to contribute appreciating assets to chosen beneficiaries using little or none of your gift tax exemption. To do this, you would transfer some of your property or accounts to the GRAT in which you will still retain the right to receive an annuity. Following a specified period of time, the beneficiaries will receive the amount remaining in the trust.
Another estate planning strategy that may be beneficial for you is to gift seed capital, typically in the form of cash, to an intentionally defective grantor trust (IDGT). You will then sell appreciating or income-producing property to the IDGT in which they will make installment payments back to you over a period of time. If the account or property increases in value over the period of the sale, the accounts or property in the trust will appreciate outside your taxable estate and will therefore avoid estate taxes. Additionally, the trust does not have to pay income taxes on the income the trust retains since the taxes are already paid on the income generated and accumulated in the trust.
In a spousal lifetime access trust (SLAT), the grantor is to gift property to a trust created for the benefit of their spouse and possibly their beneficiaries. An independent trustee can make discretionary distributions to those beneficiaries, which can also benefit you indirectly. Contrary, an interested trustee should be limited to ascertainable standards when making distributions, such as health and education. With this estate planning strategy, you can take advantage of the high lifetime gift tax exemption amount by making gifts to your spouse. This trust avoids the use of the marital deduction which means the assets in the SLAT will not be included in either your or your spouse’s gross estate for estate tax purposes.
Finally, there are irrevocable life insurance trusts (ILITs). This trust allows leveraging life insurance to ease the burden placed on your estate if it becomes subject to estate tax at your death. This type of trust is established by transferring an existing life insurance policy into the ILIT in which you make annual gifts to the trust in order to pay the premiums on the policy. At your death, the trust receives the insurance death benefit and distributes it according to the trust’s terms. The death benefit and the premiums gifted to the trust are completed gifts, meaning your estate would not include any of the trust’s value.
We are holding a series of webinars over the coming weeks, from which you can obtain a great deal of useful information. Just choose the session that fits into your schedule. The webinars are being offered on a complimentary basis, so you have everything to gain and nothing to lose. This being stated, we do ask that you register in advance so that we can reserve your seat.
To sign up for an estate planning webinar, visit Anderson, Dorn & Rader here. Once you find a date that is right for you, click on the button that you see and follow the simple instructions to register. For more information regarding estate tax exemptions and planning, connect with our estate planning attorneys today.
Many people that reside in our area have been very successful financially, and we have developed numerous relationships with high net worth families over the years. We continue to build on them, and it is gratifying to help successful people preserve their legacies for the benefit of their loved ones.
One of the most important things to take into consideration when you are engaged in the estate planning process is the potential for taxation. Though there are state-level estate taxes in some states, there is no such levy in Nevada. However, everyone in all 50 states must be concerned about the ravages of the federal estate tax.
This tax carries a 40% top rate, so we are talking about a significant level of asset erosion. It can be applied on transfers to anyone, even immediate family members, with one exception. If you are married to an American citizen, you can use the federal estate tax deduction to transfer any amount of property to your spouse in a tax-free manner.
At the time of this writing in 2019, the federal estate tax exclusion is $11.4 million. This is the amount that you can transfer to anyone other than your spouse before the estate tax would become applicable. Each year there are adjustments to account for inflation (for example, it was $11.18 million last year), so you will probably see a tick upward in 2020.
The first thought that would naturally cross your mind when you digest all the numbers above would be to give gifts to your loved ones while you are still living to avoid the estate tax.
Wealthy folks used to do this right after the estate tax was initially established in 1916. A gift tax was enacted eight years later to close this window, but it was repealed in 1926. The respite was short-lived, because the federal gift tax was reenacted in 1934, and it was unified with the estate tax in 1976.
As a result of this unification, the $11.4 million exclusion is a unified exclusion. It applies to significant gifts that you give while you are alive along with the estate that will be transferred after your death. This is the bad news, but the qualifier “significant” is the good news.
Relatively modest gifts that you give are not subject to taxation, because there is another gift tax exclusion that sits apart from the unified federal gift and estate tax exclusion. This is the annual per person exemption that allows you to give as much as $15,000 to any number of individuals within a calendar year free of transfer taxes.
This may not sound like much if you are exposed to the estate tax, but it can add up considerably when you see a bigger picture.
If you are married, you and your spouse would have a total of $30,000 to give to an unlimited number of recipients each year. Sustained gift giving over an extended period of time to people that would otherwise be inheriting the money can be an effective estate tax efficiency strategy.
Direct gift giving is a possibility, but this exclusion is often used to fund certain types of trusts, and it can be utilized to transfer assets among members of a family limited partnership.
There are two other types of gifts that can be given without incurring any transfer tax liability. One of them is the educational exemption. Under the tax code, you are allowed to pay school tuition for students without incurring any tax liability for your generosity.
This is a tuition only exemption that does not apply to books, fees, and living expenses. This being stated, you could use your annual $15,000 per person gift tax exclusion to provide extra support.
In addition to the educational exclusion, if you choose to pay medical bills for others, including health insurance premiums, there would be no transfer tax liability.
Our attorneys are holding a series of Webinars over the coming weeks, and we urge you to attend the session that fits into your schedule. There is no admission charge to pay, but we ask that you register in advance so we can reserve your seat. To check out the dates and obtain registration information, visit our Webinar schedule page.
Where you die matters. While you’ll pay the same federal estate tax no matter where you die, 1/3 of the states have a separate estate or inheritance tax. The most populous state, California, is the latest state to consider adding a state estate tax. Read on to learn more.
We serve clients in the Reno-Tahoe area, and there are many very successful people here. It is a good feeling to reach your financial goals and go forward with the knowledge that you will be able to leave a legacy for your loved ones to draw from after you are gone. This being stated, there is a looming threat that can have a negative impact on your family.
There is a federal estate tax in the United States, and the maximum rate is a whopping 40 percent. Some states in the union impose state-level estate taxes, but fortunately, here in Nevada there is no state estate tax. However, if you own valuable property in a state that does have its own death tax, it could be a factor for you.
The majority of Americans do not have to worry about the federal estate tax, because there is an exclusion that is relatively high. This is the amount that you can transfer before the estate tax would be applied. In 2011, a $5 million exclusion was established, and this figure was retained with adjustments to account for inflation through 2017.
During that year, new tax legislation was enacted, and the estate tax was impacted significantly. The exclusion went up to $11.18 million for 2018, and this is the benchmark under this law. Now that the new year is upon us, we have a slightly higher figure, because an inflation adjustment has been added. The federal estate tax exclusion in 2019 is $11.4 million.
It is important to note the fact that this is a per person exclusion, so a married couple would have a total exclusion of $22.8 million using the figure that is in place this year. Plus, the estate tax exclusion is portable between spouses. This was not the case prior to 2011. In this context, the term “portability” refers to the ability of a surviving spouse to use the exclusion that was allotted to his or her deceased spouse.
2019 Gift Tax Exclusion
When you hear about the existence of the federal estate tax, you would logically consider lifetime gift giving as a way to get around it. This used to be possible shortly after the enactment of the tax in 2016, but the gift tax was put into place in 1924 to close the loophole. It was repealed in 1926, but it came back for good in 1932.
The gift tax the estate tax are unified under the tax code. This means that the $11.4 million exclusion that we have in 2019 is a unified exclusion that encompasses lifetime gifts along with the value of your estate. For this reason, large gift giving is not an effective estate tax efficiency strategy.
In addition to the unified gift and estate tax exclusion, there is a separate annual gift tax exclusion. This allows you to give a certain amount to any number of individuals every year free of the estate tax. It is sometimes adjusted to account for inflation as well, but there will be no changes in 2019. The annual gift tax exclusion is $15,000 per person, so a married couple would have a total annual exclusion of $30,000.
If you are exposed to the estate tax, the utilization of this annual exclusion could be useful to you. To provide an example, let’s say that you have five married children. You could give $30,000 to each husband and each wife every year. This would allow you to divest yourself of $300,000 annually tax-free.
If you are on this website, you must be looking for sound information about estate planning and elder law topics. You are definitely in the right place, because we have many resources here, and you are welcome to explore the site and take advantage of the written materials.
In addition to this, we go the extra mile to provide learning opportunities to members of our community. Our estate planning attorneys hold Webinars on an ongoing basis, and you can learn a lot if you attend one of these sessions. There is no charge at all, but we do ask that you register in advance so that we can save your seat. To get all the details, visit our estate planning Webinar page.
A couple of years ago a legislative measure was passed that has subsequently been named the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. This legislation re-unified gift/estate tax exclusions.
In 2011 the amount of the unified gift and estate tax exclusion was $5 million. This year the exclusion has risen to $5.12 million to account for inflation.
Throughout both 2011 and 2012 the maximum rate of the gift tax, the estate tax, and the generation-skipping transfer tax has been 35%.
As a result of the above, people who have resources that do not exceed $5.12 million have been more or less immune from taxes on such transfers to their loved ones.
However, things are changing in the very near future.
This tax relief act is going to expire at the end of 2012. If this expiration takes place without any new legislation being enacted the exclusion will go down to $1 million while the top rate rises to 55%.
Those who have resources in excess of $1 million may want to consider giving gifts during the 2012 calendar year. There is, of course, a very limited window of opportunity left because the end of the year is rapidly approaching.
The act of funding certain types of trusts such as dynasty trusts could be taxable under gift tax regulations. Aside from giving direct gifts, however, there are methods that could allow you to take advantage of this larger exclusion to fund an irrevocable trust for the benefit of loved ones. These methods may allow for discounting, so an even greater amount may qualify for the exclusion.
Giving shares in a family limited partnership or family limited liability company may also be a possibility.
These methods are relatively sophisticated, so if you are serious about wealth preservation you would do well to discuss this temporary opportunity with a qualified Reno estate planning lawyer as soon as possible.
Due to provisions contained the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax was repealed for 2010. However, the estate tax is scheduled to return to its pre-2001 existence on January 1, 2011. For this reason it really has not had much impact on long term estate planning unless you were somehow certain that you were going to pass away in 2010.
The thing about the return of the estate tax in 2011 that is quite relevant is the fact that the exclusion amount will return to $1 million. It was $3.5 million when we last had to contend with the levy in 2009, so many estates that were previously protected are now going to be vulnerable to the estate tax. If you are in this position, or if the value of your estate has always exceeded the exclusion amount, a useful strategy that can be implemented to gain tax efficiency is that of gift giving.
The idea is that if you give gifts to your heirs while you are still alive you reduce the value of your estate to the point where it comes in under the $1 million exclusion amount. Of course, there is a gift tax to discourage this, but there are significant exemptions. The lifetime gift tax exclusion is $1 million, so you can give gifts at any time and in any increments throughout your life free of the gift tax as long as the value of these gifts does not exceed $1 million.
However, in addition to this lifetime exclusion, each taxpayer is entitled to give as much as $13,000 annually to an unlimited number of recipients, and these gifts don't count against your lifetime gift tax exclusion. You may also make unlimited educational and medical gifts, paying the tuition or medical expenses of as many people as you would like to equaling any sum of money free of the gift tax.
Contact our office today to schedule a complimentary consultation on how tax free gifts may reduce your estate's exposure to future estate taxes.
Understanding how the gift tax works is an essential part of good estate planning. A gift tax attorney can help guide you through the gifting process but put simply, the gift tax is a federal tax owed when assets are “gifted” to another person. Gift taxes can be levied on personal property, real estate, and monetary gifts.
The person giving the gift is responsible for paying the tax, but the tax is waived completely if the gift is to a spouse or if it is for medical or education purposes. In addition, any gifts to a qualifying charity or a political organization are not taxed either.
Currently, you can gift up to $13,000 per year to a single individual without paying the gift tax and you can continue to do this until you reach the $1 million dollar lifetime maximum. That means you can gift up to $13,000 of your property to whomever you choose each year. Beyond that minimum, you must file a gift tax return up to the point that the $1 million dollar threshold is reached. After that, you will be liable for a very high tax.
These limits are "per person." So if you own property jointly with your spouse, you could theoretically give up to $26,000 per year to a single individual between the two of you.
This is a popular option for seniors looking to help their heirs avoid estate taxes and, if used properly, can become a great tool in your estate planning arsenal.
To learn more about the gift tax and to find out how to best plan your estate, you should consult with a qualified gift tax attorney. Anderson, Dorn & Rader in Reno, NV has experienced attorneys that you can trust.