The federal estate tax can dramatically reduce the wealth that you are passing along to your family members. At the current time the top rate of this tax is 40 percent. This is quite a sizable chunk to be leaving behind to Uncle Sam as a parting gift.
The amount of the federal estate tax exclusion is $5.34 million. Only the portion of your estate that exceeds this amount is potentially subject to the federal estate tax. If you intend to transfer assets that exceed this amount, you must implement tax efficiency strategies.
Those who are residents of the state of New York have an added layer of concern when it comes to death taxes. Here in the state of New York we have a state-level estate tax. It is a graduated tax with a maximum rate of 16 percent.
The New York state estate tax exclusion is just $1 million. Because of this low exclusion, you can potentially be exposed to the estate tax on the state level without facing any federal exposure.
The Use of Trusts
Some people have misconceptions about trusts. They paint with a broad brush under the assumption that you surrender personal ownership when you place assets into any type of trust. This would lead you to believe that resources that you have conveyed into a trust would not be part of your taxable estate.
There are in fact certain types of trusts that are used to provide estate tax efficiency. These would be irrevocable trusts.
When you create an irrevocable trust you are surrendering incidents of ownership. You cannot rescind the trust, and generally speaking you no longer have direct personal control of the assets. (Though it could be possible to include a special power of appointment that would enable you to alter the terms under some circumstances.)
Irrevocable trusts that are used to provide estate tax efficiency include but are not limited to generation-skipping trusts, grantor retained annuity trusts, qualified personal residence trusts, charitable lead trusts, and charitable remainder trusts.
Revocable living trusts are very commonly utilized. This type of trust is good for people who are not exposed to the estate tax who want to facilitate fast and efficient asset transfers to their loved ones.
Transfers that take place through the terms of a revocable living trust are not subject to the process of probate. Probate is a legal process that can be time-consuming.
With a revocable trust you do retain incidents of ownership. For this reason, assets that have been conveyed into this type of trust would be part of your taxable estate.
If you want to use a trust to mitigate your tax exposure you would want to use an irrevocable trust rather than a revocable trust.