The death tax packs a heavy punch, because it carries a hefty 40% maximum rate. That’s right, we are talking about almost half of the legacy that you intend to pass along to the people that you love the most. Clearly, that figure will get your attention, and not in a good way.
Fortunately, we have some positive news to pass along as well. Most families do not have to be concerned about the federal estate tax, because it is only a factor for people that are quite wealthy. You can transfer as much as $11.4 million free of taxation before the estate tax would become applicable.
This is the exact figure that is in place for 2019, and it is derived from a base amount that was established after a round of tax cuts were enacted for the 2018 calendar year. You can expect to see slight adjustments year by year, until and unless there are legislative changes that alter the entire structure.
You cannot simply give gifts to people that would otherwise be inheriting the assets to sidestep the estate tax, because there is a gift tax in place. The two transfer taxes are unified under the tax code, so the $11.4 million exclusion that we have this year is a unified exclusion.
It applies to lifetime gifts along with the estate that will be passed along after you are gone. This being stated, there is an additional gift tax exclusion. You can use this before you would have to dip into your lifetime unified exclusion to facilitate tax-free transfers.
The annual $15,000 gift tax exclusion allows you to give this much to any number of gift recipients within a calendar year free of taxation. You can also pay school tuition for others without incurring any tax liability, and there is a medical bill exemption as well.
Implications for Married Couples
Now that we have set the stage appropriately, we can start to get to the point of this blog post. The gift tax and the estate tax are not a factor if you want to transfer assets to your spouse, because there is an unlimited marital deduction. Simply put, there are no taxes on transfers between spouses, but there is a major caveat.
In order to use the marital deduction, both parties must be citizens of the United States. There are tried-and-true estate tax efficiency strategies that take advantage of the marital deduction, so this can present an obstacle for foreign citizens. However, there is a solution that is custom crafted to suit people that are in this situation.
Qualified Domestic Trusts
To address this scenario, you could establish a qualified domestic trust. As the grantor of the trust, you would fund the vehicle and name a trustee to act as the administrator. Your spouse would be the initial beneficiary, and you would name secondary beneficiaries that would presumably be your children.
If you predecease your spouse, he or she would be able to receive benefits from the trust, including ongoing income that is generated by appreciable assets that are in the trust. The estate tax would not be applicable on these transfers, and this is a major benefit.
The assets in the trust would continue to grow unfettered throughout the life of your surviving spouse, and this is the other major advantage that is gained.
It should be noted that you could allow the trustee to distribute portions of the principal. However, they would be subject to the imposition of the estate tax, unless a hardship exemption was granted by the Internal Revenue Service.
After the death of the survivor, the final beneficiaries would assume ownership of the remainder that is left in the trust. The transfers would be subject to the estate tax if the value of the assets exceed the amount of the exclusion, but there would be just one round of taxation instead of two.
We Are Here to Help!
Our doors are open if you would like to discuss your unique legacy goals with a licensed estate planning lawyer. You can call us at 586-493-7661 to schedule a consultation appointment, and there is a contact form on this website that you can use if you would prefer to reach out electronically.