Once you have accumulated a significant store of wealth, the work is not done. Because of the existence of transfer taxes, you may have to take steps to preserve your wealth for the benefit of succeeding generations.
Federal Estate Tax
There is a federal estate tax that can be a significant factor for high net worth individuals. In 2016, the exact amount of the federal estate tax exclusion is $5.45 million. This is the amount that you can transfer free of the estate tax. Anything that you want to transfer that exceeds this amount is potentially taxable.
The $5.45 million figure may sound arbitrary, but it comes about as a result of inflation adjustments. Back in 2011 a $5 million exclusion was put into place. Since then, there have been ongoing adjustments to account for inflation.
In 2017 there could be another inflation adjustment applied, and the exclusion would be somewhat higher.
The maximum rate of the federal estate tax stands at 40 percent. This is a very significant bite that can profoundly impact your legacy.
Federal Gift Tax
It would be natural to consider giving gifts while you are living to avoid the estate tax. This used to be possible when the estate tax was first enacted in 1916. However, this loophole was closed when the gift tax was enacted in 1924. It was repealed in 1926, but it returned for good in 1932.
The federal gift tax is unified with the estate tax. As a result of this unification, the $5.45 million exclusion is a unified lifetime exclusion. It applies to gifts that you give while you are living along with the estate that you are passing on to your heirs.
In other words, if you give away $5.45 million in tax-free gifts, you have used all of your exclusion. As a result, all of your estate would be subject to the estate tax.
Generation-Skipping Transfer Tax
In addition to the federal estate tax and the federal gift tax, there is also the generation-skipping transfer tax. This tax is potentially applicable on asset transfers to family members who are more than one generation younger than you. It can also apply to transfers to unrelated individuals who are at least 37.5 years your junior.
Unlimited Marital Deduction
When you are evaluating the impact of the federal transfer taxes, you should understand that there is an unlimited marital deduction. This allows you to transfer any amount of property to your spouse free of federal transfer taxes, assuming your spouse is an American citizen.
The unlimited marital deduction is not available to your family if you are married to a citizen of another country; other planning may be required to minimize taxation.
While we are talking about spouses, we should touch upon the matter of estate tax exclusion portability.
The $5.45 million exclusion is allotted to each individual taxpayer. If you were to predecease you spouse, he or she could use his or her own exclusion, and she could also use yours, if the spouse timely files a request with the IRS.
State-Level Estate Taxes
In addition to the federal estate tax that is potentially applicable in all 50 states, there are 14 states in the union that impose state-level estate taxes. The District of Columbia also has its own estate tax.
We have offices in Kentucky and in Charlotte, North Carolina. Fortunately, there are no state-level estate taxes in these states. That’s the good news, but the bad news is that you could face state-level estate tax exposure if you own property in a state with an estate tax on the state level. You should explore the laws if you own property out of state.
An inheritance tax is a tax that can be levied on transfers to each individual inheritor who is not exempt. There are just six states in the union that have inheritance taxes, and there is no federal inheritance tax.
We do have a state level inheritance tax in the state of Kentucky, but close relatives like spouses, parents, children, and siblings are exempt.
Estate Tax Efficiency Strategies
If you are faced with estate tax exposure, there are estate tax efficiency strategies that can be implemented to ease the burden. The optimal course of action will vary on a case-by-case basis.
Schedule a Consultation
Estate taxes can be a factor for some people, but regardless of your financial situation, a well constructed estate plan can protect your legacy. If you would like to discuss your estate planning objectives with a licensed attorney, send us a message through our contact page to set up a consultation.
You can also call us at (704) 944-3245 in Charlotte or (606) 324-5516 in Ashland, KY.