It is very satisfying to accumulate a significant store of wealth. When you are planning your estate as a high net worth individual, you have opportunities to foment your legacy and provide pathways for your loved ones. This being stated, there is one negative that goes along with extreme financial success. We have a federal estate tax to contend with, and it can be huge source of asset erosion, because it carries a very hefty 40 percent maximum rate.
There is a federal estate tax credit or exclusion that glad to transfer a certain amount before the estate tax would become applicable. The recent changes in the tax code had a very positive impact for people that are facing estate tax exposure. Between 2011 and 2017, the exclusion was somewhere in the vicinity of $5 million as gradual adjustments to account for inflation. However, after the tax legislation passed, the estate tax exclusion was essentially doubled. For the rest of 2018, it stands at $11.18 million.
Estate Tax Exclusion Portability
Until relatively recently, the estate tax exclusion was not portable between spouses. In this context, the concept of “portability” refers to the ability of a surviving spouse to use the exclusion that was afforded to his or her deceased spouse. Many people thought that the lack of portability was unfair, and they can make a solid case.
If a married couple combine their efforts to accumulate wealth throughout their lives, why should a widow or widower be left with just a single exclusion? Fortunately, a number of years ago portability was installed, so a surviving spouse can now use two exclusions. Using the figure that is in place this year, this would equate to $22.36 million.
Portability is available, but it is not automatically granted by the powers that be. A representative of the estate must file Internal Revenue Service Form 706 to opt for portability. It must be filed within nine months of the passing of the decedent, but if more time is needed, the IRS may grant an extension that can be as long as six months.
It would be logical to resolve to give gifts to loved ones while you are living to avoid the federal estate tax. The death tax was originally enacted in 1916, and at first, people were able to give gifts to sidestep this levy. However, tax advocates in Congress were not particularly happy with this arrangement, so in 1924, a gift tax was put in place. It was repealed in 1926, but it returned in 1934, and it is then a fact of life ever since.
At the present time, the gift tax is unified with the federal estate tax. As a result, the $11.18 million exclusion is unified exclusion that encompasses large lifetime gifts along with the value of your estate. We use the term “large” lifetime gifts for a very specific reason.
There is another gift tax exclusion that sits apart from the unified lifetime gift and estate tax exclusion. We have an annual gift tax exclusion United States that allows you to give up to $15,000 to an unlimited number of different recipients each year free of taxation. The utilization of this exclusion can be part of an estate tax efficiency strategy, and depending on the extent of your resources, it can be quite effective.
This is exclusion is allotted to each individual taxpayer, so a married couple would be able to give $30,000 to any number of people annually tax-free. To provide an example, let’s say that you have five their children. You and your spouse could give $30,000 to each husband and wife for a total of $60,000 per couple per year. If you do this over an extended period of time, you can transfer a good bit of money in a tax-free manner, and you would be reducing the taxable value of your estate while you are doing so.
There are number of different irrevocable trusts that are used by people that are looking for ways to transfer assets in a tax efficient manner. These would include grantor retained annuity trusts, generation-skipping trusts, qualified personal residence trusts, and charitable trusts.
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