You have to be concerned about the potential for legacy erosion if you have been very successful from a financial standpoint. There is a federal estate tax with a 40 percent maximum rate, so it can have a significant impact on your family’s future.
Estate Tax Exclusion
Right now, the federal estate tax exclusion is $11.7 million. This is the amount that can be transferred tax-free before the estate tax would be imposed on the remainder. The current level is the highest it has ever been, and it was established via a provision in the Tax Cuts and Jobs Act.
This measure was enacted at the end of 2017, and during that year, the exclusion was $5.49 million. The provision that increased the estate tax exclusion is going to sunset on January 1, 2026. At that time, it is going back down to $5.49 million.
There is a bill in the relevant Senate right now called the For the 99.5 Percent Act. It was introduced by Senator Bernie Sanders of Vermont, and it would reduce the exclusion to $3.5 million, and the maximum rate would go up to 65 percent.
Clearly, there is going to be zero Republican support for this measure, so its enactment is unlikely. However, it does underscore the fact that there are lawmakers that would like to expand the estate tax, so you should be aware of this possibility.
Estate Tax Marital Deduction
If you are married, you can transfer unlimited assets to your spouse free of taxation. This can seem like an estate tax efficiency strategy, and it is to some extent, but your spouse would then be in possession of a taxable estate.
Federal Gift Tax
Lifetime gift giving would be a way to get around the estate tax, and there is some latitude in this regard, but the multimillion dollar exclusion is a unified exclusion. It applies to large gifts that you give while you are living and your estate.
We use the qualifier “large” gifts because there is an additional $15,000 annual exclusion. This much can be given to any number of people each year tax-free without using any of your unified gift and estate tax exclusion.
A married couple could combine their exclusions to give as much $30,000 to an unlimited number of gift recipients each year, and this can add up over time. You would be able to make tax-free transfers, and the value of your estate would be getting lower.
New York Estate Tax
New York is one of 12 states with state-level estate taxes, and the exclusion is $5.93 million. This is another thing to keep in mind when you are considering potential transfer tax liability.
There are a number of different irrevocable trusts that can be used to facilitate tax efficient transfers. One of them is the qualified personal residence trust. You can use this type of trust to transfer your home to a beneficiary at a tax discount.
If you have assets in your possession that are highly appreciable, you can potentially use the grantor retained annuity trust to gain estate tax efficiency. A generation-skipping trust can benefit two generations, but one round of taxation would be avoided.
These are a few of the irrevocable trusts are used by high net worth individuals to gain estate tax efficiency, and there are others.
Family Limited Partnership
The family limited partnership is typically thought of as an asset protection structure. It is indeed a useful asset protection tool, but there are ways that you can facilitate transfers at a tax discount if you have a family limited partnership.
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We are here to help if you would like to discuss estate tax efficiency or any other matter with a licensed Smithtown, NY estate planning lawyer. You can send us a message to schedule a consultation, and we can be reached by phone at 631-265-0599.