Like most people, you have probably heard of federal gift and estate taxes and know that you don’t want your estate to incur the tax; however, do you really need to worry about estate taxes? The answer is not a simple one except to say that most people should be concerned about the possibility that their estate will incur federal gift and estate taxes. With proper estate planning that starts early enough though, your estate may be able to avoid paying estate taxes or you will at least be able to diminish your estate’s exposure to the tax. Only an experienced North Carolina estate planning attorney can evaluate your estate assets and provide you with advice on how best to decrease the amount of gift and estate taxes your estate may owe; however, a better understanding of the tax will help you understand the potential problem and some common solutions as well.
What Is Federal Gift and Estate Tax?
Federal gift and estate taxes are potentially levied on the combined value of all applicable gifts you made over the course of your lifetime and the assets owned by you at the time of your death. Almost all gifts you made during your lifetime count toward federal gift and estate taxes. Likewise, all assets you own at the time of your death, including both real and personal property as well as tangible and intangible assets, count toward the value of your estate. For example, if you gifted assets valued at $2 million prior to your death and left an estate valued at $6 million at the time of your death, you would have $8 million potentially subject to federal gift and estate tax. Though the rate at which estates were taxed fluctuated considerably in the past, the American Taxpayer Relief Act of 2012 (ATRA) permanently set the gift and estate tax rate at 40 percent. Any federal gift and estate taxes due from your estate must be paid before estate assets can be transferred to the intended beneficiary or legal heirs of the estate.
The Lifetime Exemption
Arguably the most important thing ATRA did was to permanently set the lifetime exemption limit at $5million, adjusted annually for inflation. Each taxpayer is entitled to exempt up to the lifetime exemption amount before federal gift and estate taxes are levied on the estate. For the year 2016, the lifetime exemption amount is $5.45 million. Therefore, if the total amount of your lifetime gifts and assets owned at the time of death is $8 million you would be left with $2.55 million subject to the tax after deducting the lifetime exemption limit. At a tax rate of 40 percent your estate would incur a $1.02 million federal gift and estate tax bill.
How Can You Avoid Incurring Estate Taxes?
Because it is impossible to know what your estate will be worth at the time of your death it is always best to plan for the possibility that your estate will be sufficiently valuable to incur federal gift and estate taxes. Only an experienced estate planning attorney can provide you with an individualized plan to avoid paying the tax; however, some common strategies include:
- Unlimited Marital Deduction – if you are married you can leave an unlimited amount of assets to your spouse tax-free. The problem with using this strategy is that it often results in over-funding the spouse’s estate, effectively just prolonging the inevitable.
- Annual exclusion – this allows each taxpayer to make tax-free gifts valued at up to $14,000 to an unlimited number of beneficiaries each year. Couples can combine their gifts and give gifts valued at up to $28,000 using “gift splitting.” Along with being tax-free, the gifts do not count toward your lifetime gifts for the purpose of calculating federal gift and estate taxes.
- Trusts – certain types of trusts can help you transfer wealth while decreasing the tax implications of the transfer.
The overall key to avoiding estate taxes is to transfer as much wealth as possible tax-free during your lifetime. The best way to accomplish that goal is to work closely with an experienced North Carolina estate planning attorney as early on in your life as possible.
If you have additional questions about federal gift and estate taxes, or about estate planning in general, the State of North Carolina contact the experienced estate planning attorneys at The Law Offices of Cheryl David by calling 336-547-9999 to schedule an appointment.