A comprehensive estate plan should do more than just decide how your assets are to be distributed after your death. It should also protect those assets during your lifetime and beyond. One way to do that is to incorporate tax avoidance strategies and tools into your estate plan. To help get you started, the estate planning attorneys at The Mendel Law Firm, L.P answer some frequently asked questions about tax avoidance planning within your estate plan. If you have additional questions or concerns, please feel free to contact our office to schedule a consultation.
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The federal gift and estate tax is essentially a tax on the transfer of wealth. Every estate is potentially subject to the federal gift and estate tax; however, every taxpayer is also entitled to an exemption. Federal gift and estate taxes are levied on the combined total of the value of all gifts made during a taxpayer’s lifetime and the value of all assets owned by the taxpayer at the time of death. Although the federal gift and estate tax rate fluctuated historically, the American Taxpayer Relief Act of 2012 (ATRA) permanently set the rate at 40 percent.
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While every taxpayer’s estate is subject to federal gift and estate taxes, a handful of states also impose an estate tax. Fortunately for Texas residents, the State of Texas does not impose a state level gift and estate tax. If you own property in another state, however, you would be wise to find out if that state imposes a state level estate tax because your property in that state could be subject to the tax.
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An estate tax is a tax imposed on the estate of a deceased individual. An inheritance tax is a tax imposed on an individual when they inherit assets. An estate tax must be calculated and paid by the estate using estate assets prior to any assets being passed down to beneficiaries or heirs. An inheritance tax is paid by the beneficiary or heir after those estate assets have been passed down.
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Each taxpayer is entitled to make use of 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. For 2019, the lifetime exemption amount would be $5.49 million for an individual and $10.98 million for a married couple; however, President Trump signed tax legislation into law that changed the lifetime exemption amount for 2018 and for several years to come. Under the new law, the exemption amounts increased to $11.4 million for individuals and $22.8 million for married couples for 2019. These exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation. The temporary increase in the lifetime exemption amount presents an opportunity for those with significant taxable assets to transfer more of that wealth without incurring taxes over the next few years.
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Portability refers to a surviving spouse’s ability to use any unused portion of a deceased spouse’s lifetime exemption. For examples, imagine that Eric and Nancy are married. Eric passes away in 2019 leaving behind an estate valued at $9 million. Eric’s estate would use $9 million of his $11.4 million lifetime exemption. The remaining $2.4 million would “port” over to Nancy. Nancy would then have a $13.4 million exemption (Nancy’s $11.4 million plus Eric’s $2.4 million = $13.4 million) that can be used when Nancy’s estate is probated. Keep in mind that these figures only work while the increased lifetime exemption amount is in place.
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The annual exclusion is an extremely beneficial tax avoidance tool that allows each taxpayer to gift up to $15,000 in assets to an unlimited number of beneficiaries each year tax-free. Couples can gift-split and gift assets valued at up to $30,000. By way of illustration, a married couple with four children could transfer $120,000 in assets each year without using any of their lifetime exemption.
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