Without question, financial success is a beautiful thing, but there is one drawback that goes along with it. We have a federal estate tax in place, and it carries a whopping 40 percent maximum rate.

The good news is that there is an estate tax credit or exclusion that allows you to transfer a certain amount before the estate tax would kick in. There are annual adjustments to account for inflation, but at the time of this writing in 2019, the federal estate tax exclusion is $11.4 million.

We should point out the fact that the tax is applicable on transfers to anyone, even close relatives, with one exception. There is a spousal estate tax exemption that allows for unlimited tax-free transfers between spouses. However, to take advantage of this exemption, the people in question must be American citizens.

When you are calculating the value of your estate for tax purposes, you have to include your primary place of residence and the other homes and/or tracts of land that you may own. The value of your property alone could consume a significant portion of your available estate tax exclusion.

In addition to the federal estate tax, there is also a federal gift tax. It is unified with the estate tax, so the exclusion is a unified exclusion that extends to lifetime gift giving along with the value of your estate. Since this gift tax is in place, you cannot give large gifts to sidestep the federal estate tax.

This being stated, there is another gift tax exclusion that can be used to gain estate tax efficiency if your estate is going to be subject to taxation. The annual gift tax exclusion allows you to give as much as $15,000 tax-free to any number of recipients in a given calendar year.

If you are married, you and your spouse could combine your exclusion to give as much us $30,000 to anyone free of taxation.

When you are extremely wealthy, this may not seem like enough to make an impact when you are looking down the barrel of the estate tax. However, depending on the extent of your resources, sustained gift giving could work to your advantage.

To provide an example, let’s say that you have five married children. You and your spouse could give $30,000 to each husband and each wife every year. This would result in annual tax-free transfers equaling $300,000.

If you do this over an extended period of time, a significant amount of money could change hands free of taxation. Plus, the taxable value of your estate would be reduced.

State Estate Taxes

In addition to the federal estate tax, there are a number of states that have state-level estate taxes as well. As luck would have it, there is a state-level estate tax here in New York.

It is quite possible to be exempt from the federal tax and exposed to the New York State estate tax, because the exclusion of the state level is just $5.74 million. Plus, if the value of your estate is more than 5% over this amount, you can’t use any of the exclusion.

Estate Tax Efficiency Strategies

In addition to the measured gift giving approach that we described above for federal estate tax efficiency, there is no state-level gift tax at all, so gifting can provide a solution.

Aside from lifetime divestitures, there are a number of other ways that you can transfer assets at a tax discount. These strategies will typically involve the utilization of different types of irrevocable trusts.

If you have securities that are likely to appreciate significantly, you could implement the zeroed out grantor retained annuity trust strategy to facilitate a tax efficient transfer.

We mentioned home ownership previously. Your home could be transferred at a tax discount if you establish a qualified personal residence trust.

A generation skipping trust is another tax efficiency device for the wealthy. With a generation skipping trust, two generations of your family could benefit, but there would be just one round of taxation. These are handful of the trusts that are often utilized, but there are others.

Schedule a Consultation!

We are here to help if you would like to explore estate tax efficiency strategies. Our firm offers no obligation consultations, and you can give us a call at (585) 546-1734 to set up an appointment. There is also a contact form on this website that you can use to send us a message.