Estate Tax Planning

Much of your life’s legacy could be lost to estate taxes without proper planning. While a simple will can provide for the transfer your assets to your loved ones, it does not contain special provisions for advanced estate tax planning.

The Federal Estate Tax: Exemptions & Rate

Federal estate tax law currently provides for an exemption that is adjusted annually for inflation. In 2018, the exemption is $5.6 million for an individual and $11.2 million for a married couple. This means that up to these amounts can be left to heirs without paying an estate tax. In addition, the annual gift exclusion amount has been raised to $15,000, up from $14,000.

The taxable value of the estate is calculated by adding up all the assets owned by the individual and subtracting any liabilities from that amount. Additional deductions can also be taken for qualified charitable deductions as well as administrative and legal costs related to settling the deceased’s estate.

The tax rate for estates exceeding the exemption amount is 40%. The rate is applied to the taxable estate value that is in excess of the exemption amount.

The Federal Estate Tax: Understanding Portability

In addition to the individual exemption, married couples enjoy an unlimited deduction for transfers to one another. This is beneficial for those couples who choose to leave their estate to each other. Without proper planning, however, it can result in a forfeiture of some of the individual estate tax exemptions after the passing of the second spouse.

This can occur, for example, when a husband leaves $3 million of his individually-owned assets to his surviving wife who already has $5 million herself. This would bring her total net worth to $8M. The bequest to his wife is not subject to estate taxes, however, because it qualifies for the unlimited marital deduction. After some time, the wife also passes away, leaving everything to the children. While her estate can take advantage of her individual exemption of $5.6 million, the remainder could be subject to estate taxes because her husband’s individual exemption was not utilized.

To address this issue, the current estate tax law allows for “portability” of individual exemptions between spouses. In short, estate tax portability enables the surviving spouse to utilize the unused portion of the estate tax exemption of the predeceased spouse. Portability is not automatic, however. In order to take advantage of it, an estate tax return must be filed with the IRS within 9 months of the passing of the first spouse, even if there are no taxes due at the time.

An alternative to relying on portability is to utilize a special planning tool referred to as a credit shelter trust (also referred to as a bypass or A-B trust). If properly established, such trusts work much in the same way as portability, but do not require filing of an estate tax return after the passing of the first spouse.

Finally, it is worth noting that a number of states impose a separate estate or inheritance tax.  While the rates are typically much lower than the federal rate of 40%, the exemption amounts are smaller as well.

Advanced Estate Planning for High Net Worth Individuals

Individuals and families with significant net worth might still have taxable estates even if they take full advantage of their respective exemptions.  For these individuals, there are a variety of advanced planning techniques that can be utilized to help reduce the estate tax burden. These include strategic gifting plans, life insurance trusts, personal residence trusts and grantor retained annuity trusts.

Same-Sex Couples

The U.S. Supreme Court’s ruling in 2015 recognizing marriage equality allows same-sex couples previously married under state law to take advantage of all the federal privileges afforded to traditional couples, including those related to federal gift and estate taxes.

The Bottom Line

In the end, tax planning strategies are inherently complex, which makes having the guidance of experienced estate planning attorney invaluable. Our attorneys can help you design a plan that allows you to pass on as much of your hard-earned assets as possible to your loved ones and beneficiaries.