If you have a moderate to large estate that you plan to pass down to loved ones, one of your primary estate planning concerns should be the federal (and in some cases state) gift and estate tax. If you fail to plan for the impact the tax could have on your estate, your loved ones could lose a significant portion of their inheritance to Uncle Sam. To help illustrate the importance of planning, the Bath estate planning attorneys at the Law Office of Michael Robinson, P.C. discuss how large of an estate can pass tax-free.
Federal Gift and Estate Tax Explained
The federal gift and estate tax is effectively a tax on the transfer of wealth that is collected from your estate after you die. Every estate is potentially subject to federal gift and estate taxes. The tax applies to all qualifying gifts made during a taxpayer’s lifetime as well as all estate assets owned by the taxpayer at the time of death. By way of illustration, assume that you made gifts during your lifetime totaling $4 million in value. At the time of your death, you owned assets valued at $11 million. The combined total of $15 million would be subject to federal gift and estate taxes. Although the federal gift and estate tax rate fluctuated historically, the American Taxpayer Relief Act of 2012 (ATRA) set the rate at 40 percent. Without any deductions or adjustments, Uncle Same would be entitled to $6 million in federal gift and estate taxes from your estate.
The Lifetime Exemption and the 2018 Changes
Fortunately, every taxpayer is entitled to make use of the lifetime exemption to reduce the amount of gift and estate taxes owed by their estate. ATRA set the lifetime exemption amount at $5 million, to be adjusted for inflation each year. In 2018, however, President Trump signed tax legislation into law that changed the lifetime exemption amount for that year and for several years thereafter. Under the new law, the exemption amounts increased to $11.4 million for individuals and $22.8 million for married couples for 2019, meaning you could pass assets valued up to those amounts tax-free. These exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation. Consequently, that same $15 million estate would now only pay gift and estate taxes on $3.6 million, reducing the amount of federal gift and estate taxes to $1.44 million. The temporary increase in the lifetime exemption amount presents an opportunity for those with significant taxable assets to transfer more of that wealth without incurring taxes over the next few years. If you fall into that category, now is a good time to review and revise your estate plan.
What Else Can You Do to Avoid Estate Taxes?
The ability to make use of the increased lifetime exemption is certainly beneficial; however, it is important to remember that the increase is only temporary. It is always wise to make use of additional tax avoidance tools and strategies within your estate plan when possible. The annual exclusion, for example, allows every taxpayer to make gifts of up to $15,000 to an unlimited number of beneficiaries without incurring a tax obligation. Moreover, gifts made using the annual exclusion don’t count toward your lifetime exemption. Imagine, for example, that you made annual gifts to your four children and six grandchildren each year for ten years. You could transfer $1.5 million tax free.
How Does the New York Estate Tax Impact My Estate?
The State of New York is one of a handful of states that also imposes a state level estate tax. It works in essentially the same way as the federal tax; however, the increased lifetime exemption does not apply to the state tax. Therefore, for the year 2019, the New York exemption amount remains in line with ATRA at $5.74 million. The rate at which your estate will be taxed if it is valued above the exemption amount ranges from just over three percent to 16 percent.
Contact Bath Estate Planning Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how to avoid estate taxes when passing down your estate, contact the Bath estate planning attorneys at the Law Office of Michael Robinson, P.C. by calling (585) 546-1734 to schedule an appointment.