Estate Tax Planning

Without strategic preparation, a great deal of your life’s hard earned assets can be lost to estate taxes. Even though a will can simply transfer your estate property to the beneficiaries of your choice, it doesn’t have the special provisions to avoid advanced estate taxes.

 

The Federal Estate Tax: Exemptions & Rate


As of the 2016, the American Taxpayer Relief Act has updated their federal estate tax law which now provides up to $5.45 million in tax exemptions. This means that each individual is allowed to transfer up to $5.45 million in property, cars, and possessions without being taxed. This amount is scheduled to increase annually due to inflation.

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The taxable value of the estate is roughly calculated by one’s net worth. The net worth which is also known is “wealth” is the total DATE OF DEATH FAIR MARKET VALUE amount of assets minus all outside liability that an individual possess. Additional deductions may be taken out for legitimate charitable contributions and costs of settling the deceased’s estate.

 

If the estates exceed the amount that is exempted the amount of the tax rate is 40% and can be more. The tax rate is only applied to the amount that is exceeded, not the total amount.

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The Federal Estate Tax: Understanding Portability


Married couples have the luxury of transferring estate from one to another without being taxed. This means that couples are exempted from paying federal estate tax when one passes. This may be great news for couples who decide to leave their possessions for the other, but when the second passes the estate is no longer exempted from the federal estate tax.

 

For instance, a wife leaves behind $4.5 million of her individual assets to her husband that already has $5 million of his own assets, giving him a $9.5 million in total assets. This transaction wouldn’t get taxed because it qualifies for the unlimited marital deduction. Eventually, the husband passes away and leaves everything to his children. Even though he was able to collect his wife’s assets tax free doesn’t mean his children can too. The children would be able to collect $5.45 million with an exemption but would have to pay a 40% federal estate tax on the remaining $4.05 million. At the end, the kids would have collected $7.88 million instead of $9.5 million because the wife’s individual balance was unutilized.

However, with the proper paperwork and certain conditions, the unused or unutilized exemption from the first spouse to die can be claimed on the federal estate tax return when the surviving spouse dies. This is known as “portability” and it could effectively double the exemption amount that existed at the time the first spouse dies.

Another special planning tool one can utilize is an “A-B trust” which is also referred to as a “Credit Shelter Trust”. This special trust works the same way as portability, except this one doesn’t require you to fill out any estate tax return at the time of the first spouse’s passing.

 

Special Planning for High Net Worth Individuals

 

Even if one has taken full advantage of their exemptions, depending on their net worth, that individual might still have taxable estates. In this case, a more advanced planning technique would have to be created to avoid such a significant tax burden. Strategic techniques such as life insurance trusts, personal residence trusts grantor retained annuity trusts, and strategic gifting plans.

 

Estate tax planning can be very difficult, complex, and hard to execute, but with the help of the highly skilled and experienced estate tax planning attorneys at the Law Offices of Savin & Bursk, one can successfully pass on as much as possible of their hard earned assets to their loved ones.