When you create an estate plan you should consider the impact federal and/or state taxes will have on your estate. To do that, you need to understand how those taxes work. While it is important to consult with an experienced attorney about your unique needs and goals when creating an estate plan, a Murfreesboro estate planning attorney at Bennett, Michael & Hornsby explains the basics of gift and estate taxes.
What Is the Federal Gift and Estate Tax?
Every taxpayer is subject to federal gift and estate taxes which is basically a tax on the transfer of wealth that is collected from the estate of a taxpayer during probate. The tax applies to all “qualifying” gifts made during a taxpayer’s lifetime (also all gifts) as well as all estate assets owned by the taxpayer at the time of death. For example, if you made gifts during your lifetime totaling $1 million in value and at the time of your death your estate was valued at an additional $6 million, the combined total of $7 million would be subject to federal gift and estate taxes. For many years, the federal gift and estate tax rate fluctuated; however, in 2012 the American Taxpayer Relief Act (ATRA) was passed which permanently set the tax rate at 40 percent. Without any adjustments, your $7 million estate would owe $2.8 million is federal gift and estate taxes.
Does Tennessee Have an Estate Tax?
While every estate is subject to federal gift and estate taxes, some estates are also subject to gift and estate taxes imposed at the state level as well. Fortunately for Tennessee residents, Tennessee is not one of the states that imposes a state gift and estate tax. If a decedent owned property in another state, however, you would need to check the laws of that state to determine if any state level gift and estate taxes are owed.
How Can My Estate Avoid Estate Taxes?
If you pass down a moderate to large estate, avoiding federal gift and estate taxes should be one of your estate planning goals. There are several estate planning strategies that can help you decrease, or avoid altogether, gift and estate taxes, including:
- Making lifetime gift. Transferring as much of your wealth as possible during your lifetime is a simple way to reduce the value of your probate estate which, in turn, lowers (or eliminates) your tax obligation.
- Making use of the lifetime exemption. Every taxpayer is entitled to use the lifetime exemption to reduce the amount of gift and estate taxes owed by their estate. ATRA set the lifetime exemption amount at $5 million, to be adjusted for inflation each year. In 2018, however, President Trump signed tax legislation into law that increased the lifetime exemption amount for several years. For example, the lifetime exemption is $11.58 million for 2020, meaning your estate would not owe taxes unless the combined value exceeded $11.58 million.
- Utilizing the yearly exclusion. The yearly exclusion allows each taxpayer to make annual gifts valued at up to $15,000 (for 2020) to an unlimited number of beneficiaries without those gifts counting toward your lifetime exemption. Married couples can combine their exclusion and make gifts valued at up to $30,000.
- Creating an asset protection trust. Trusts are among the most common addition to an estate plan. There are several trusts specifically designed to help protect your assets, all of which begin as an irrevocable living trust. The law views the assets in an irrevocable trust as belonging to the trust once they are transferred into the trust. For that reason, assets in an irrevocable living trust are not included in your estate and are, therefore, not subject to federal gift and estate taxes.
Contact a Murfreesboro Estate Planning Attorney
If you have additional questions or concerns regarding gift and estate taxes, consult with an experienced Murfreesboro estate planning attorney at Bennett, Michael & Hornsby as soon as possible. Contact the team today by calling 615-898-1560 to schedule your free appointment.