Likely you have been reading a lot about the new federal estate tax exemption at $5.43 million per taxpayer, or $10.86 million per couple. Virtually all of the articles say there is no need to worry about "death taxes" with an exemption that high.
But what if your estate is still impacted, with a 40% tax rate on the amount in excess to boot?
Now, that is personal, yes?
So, what should you do?
According to a recent article in The Marietta Daily Journal, titled “Estate reduction ensuring wealth transfer to heirs,” you should get professional assistance!
The article explains further:
“While a financial adviser is helpful in planning asset transfers to heirs, an expert in estate tax law is key for ensuring documents are structured properly.”
To make matters even more challenging, estate and gift tax laws are subject to change.
Nothing is constant but change, after all.
Just when you thought it was safe to go into the water ....
One easy tactic for affected wealthy families is gifting.
Did you know individuals can gift up to $14,000 per year, per individual without incurring a gift tax?
Did you know that amount doubles for spouses?
Even if you exceed that limit, all you do is file an informational Form 709 Gift Tax return.
Your estate tax exemption is reduced at death by the amount of the "taxable gift," but there is no out-of-pocket tax paid now or an any appreciation or income from the gifted assets thereafter on your personal tax return.
Another play is to pay for medical care, insurance premiums, and education costs for anyone you wish.
Even better, these transfers do not count against the $14,000 limit.
Caveat: The "gift" must be paid directly to the institution or service provider to qualify.
Have you heard about “power-funding” a 529 Plan College Savings Plan?
This is a real gem.
The Plans allow you to contribute a lump sum (up to $70,000 per beneficiary) and then elect to treat the contribution as if it were made over five years for gift tax purposes.
Those assets immediately leave your estate, along with any appreciation or income from the gifted assets thereafter on your personal tax return.
Older heirs might do well with a Grantor Retained Annuity Trust (GRAT), and you definitely will need to work with an estate planning attorney to set this up.
What does a GRAT do, you ask?
A GRAT allows you to transfer rapidly appreciating or income-producing property to heirs while retaining an interest in the property over a set term, from two to 20 years.
Translation: As the grantor, you are making an irrevocable, taxable gift to the beneficiaries, and the value of the gift is discounted by your retained interest.
Taxes owed on the gift to a GRAT can be partially or fully offset by the grantor’s applicable lifetime gift tax exclusion amount.
The trust pays the grantor a taxable income from the assets, based on an interest rate set by the IRS.
This payment of the income tax is an even further wealth transfer because your heirs need not pony up to pay the taxes.
The assets in the trust hopefully will grow at a higher rate than the annuity stream, and the excess growth will pass to the remainder beneficiaries without any gift taxes.
As the article emphasizes, an experienced estate planning attorney can create strategies for your unique circumstances.
He or she will be there for you should there be any prospective changes in law, too.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.
Reference: The Marietta Daily Journal (June 5, 2015) “Estate reduction ensuring wealth transfer to heirs”