Creating a comprehensive, and successful, estate plan requires you to consider much more than just who will receive your estate assets after you are gone. For example, protecting your estate assets to ensure they are available to pass down at the end of your life should also be an important consideration in your plan. One of the biggest potential threats to your estate assets actually occurs just after your death in the form of federal gift and estate assets. To help ensure that you understand this potential threat and how to plan accordingly, a Fargo estate planning lawyer explains the federal gift and estate tax.
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 collected at the time of your death. The tax rate fluctuated in the past; however, the American Taxpayer Relief Act of 2012 (ATRA) permanently fixed the gift and estate tax rate at 40 percent. The tax is levied on both gifts made during your lifetime and the value of assets you own at the time of your death.
Will Your Estate Owe Federal Gift and Estate Taxes?
Whether or not your estate will incur a federal gift and estate tax debt depends primarily on the value of your estate at the time of death coupled with the value of any qualifying lifetime gifts you made prior to your death. To illustrate how federal gift and estate taxes are calculated, assume that at the time of your death you left behind an estate valued at $8 million. You also made qualifying gifts during your lifetime of $4 million. Your taxable estate is valued at $12 million. At a tax rate of 40 percent, however, your estate would owe $4.8 million to Uncle Sam before any exemptions, deductions, or adjustments.
The Lifetime Exemption
Fortunately, there are adjustments and deductions that might help reduce your estate’s tax obligation. Every taxpayer is entitled to make use of the lifetime exemption which is essentially a deduction taken prior to calculating the tax. Historically, the lifetime exemption limit fluctuated on a regular basis prior to the passage of the ATRA. In 2012, ATRA set the lifetime exemption limit at $5 million, to be adjusted annually for inflation. The Tax Act of 2018, also impacted the lifetime exemption amount, making the exemption $10,980,000 for an individual. This means that every taxpayer may deduct $10,980,000 from their taxable estate before federal gift and estate taxes are levied on the estate. Using the example above of a $12 taxable estate, it will be reduced to just over $1million after deducting the lifetime exemption for the purpose of calculating your gift and estate taxes due. Consequently, your estate would owe just over $400,000 in federal gift and estate tax instead of $4.8 million.
Reducing Your Tax Liability
If you aren’t too keen on giving the government a sizeable chunk of your estate after your death, the good news is that there are numerous tax avoidance tools and strategies that can be included in your estate plan to help reduce your estate’s exposure to federal gift and estate taxes. Leaving your entire estate to a spouse avoids the tax on a temporary basis by using the “unlimited marital deduction.” The marital deduction allows you to leave an unlimited amount of assets to a spouse tax-free; however, relying exclusively on the deduction doesn’t work in the long run because it often over-funds your spouse’s estate. Consequently, you have only prolonged the payment until your spouse’s death. A strategy that does work involves incorporating the annual exclusion into your estate plan. The exclusion allows you to make gifts of up to $15,000 to an unlimited number of beneficiaries each year tax-free. Gifts made using the annual exclusion do not count toward your lifetime exemption.
Contact a Fargo Estate Planning Lawyer
If you have additional questions or concerns about how the federal gift and estate tax might impact your estate, contact an experienced Fargo, North Dakota estate planning lawyer at German Law Group by calling 701-738-0060 to schedule an appointment.