Working hard, saving regularly, and investing wisely will certainly ensure that you amass a moderate to large estate; however, if you fail to protect the assets that make up your estate your beneficiaries will ultimately lose out in the end. One of the most potentially devastating threats to your estate assets is the federal gift and estate tax. Careful planning can help you decrease, or even eliminate, your estate’s exposure to federal git and estate taxes. The Minot estate planning attorneys at German Law Group explain portability, one important aspect of federal gift and estate tax planning.
The Federal Gift and Estate Tax
The federal gift and estate tax is effectively a tax on the transfer of wealth that is collected from your estate during the probate of your estate. Every taxpayer is subject to federal gift and estate taxes. The tax applies to all qualifying gifts (almost all gifts are considered “qualifying” gifts) 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 was subject to change – and did change on a regular basis. The American Taxpayer Relief Act of 2012 (ATRA), however, permanently set the rate at 40 percent. Without any deductions or adjustments, that $15 million estate would owe $6 million in federal gift and estate taxes.
2018 Changes to the Lifetime Exemption
Fortunately, each taxpayer is entitled to factor in the lifetime exemption prior to calculating the amount of gift and estate taxes owed to Uncle Sam. ATRA set the lifetime exemption amount at $5 million, to be adjusted annually for inflation. In 2018, however, President Trump signed tax legislation into law that changed the lifetime exemption amount for 2018 and for several years thereafter. Under the new law, the exemption amounts increased to $11.4 million for individuals and $22.8 million for married couples for 2019. 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. Consequently, that same $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.
What Is Portability and How Does It Impact My Tax Avoidance Planning?
ATRA also made the concept of portability permanent. Portability refers to a surviving spouse’s ability to use any unused portion of a deceased spouse’s lifetime exemption. For example, let’s say that your spouse passes away in 2019 leaving behind an estate valued at $8 million (including any lifetime gifts). Your spouse would only need to use $8 million of his/her $11.4 million exemption. The remaining $3.4 million would “port” over to you. You would then have a $14.4 million exemption (your $11.4 million plus your spouse’s $3.4 million = $14.4 million) that can be used when your estate is probated. Those figures only apply as long as the increased lifetime exemption amount is in place; however, the concept of portability is permanent.
Contact Minot Estate Planning Attorneys
Please join us for an upcoming FREE seminar. If you have additional questions or concerns about portability, or tax avoidance planning within your estate plan in general, contact the Minot estate planning attorneys at German Law Group by calling 701-738-0060 to schedule an appointment.
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