As you go through life, you pay taxes on your income and your investment gains. Anything that will go to your loved ones after you are gone will be a remainder that is left after you paid these taxes, and these are not the only taxes that you pay along the way.
It would be logical to assume that your death would not be a taxable event since you already paid innumerable taxes. Though this makes sense to many people, there are estate taxes to contend with, and they can be considerable.
On the federal level, we have an estate tax that carries a 40 percent maximum rate. There is a credit or exclusion that allows you to transfer a certain amount before the tax would be applied, and the portion of your estate that exceeds this amount would be subject to taxation.
This figure is adjusted yearly to account for inflation, but at the present time, it stands at $5.45 million. Transfers to your spouse are not taxable as long as you and your spouse are American citizens, but transfers to anyone else are subject to the estate tax.
A logical response to the estate tax would be lifetime gift giving. Wealthy people did this for a while after the estate tax was first enacted back in 1916, but there has been a gift tax in place since 1932 to close this window. The $5.45 million figure is a unified exclusion. You can use it to give tax-free gifts while you are living, but you would be reducing the amount that would be left to apply to your estate.
There are some states in the union that impose state-level estate taxes, and in most of these states, the exclusions are lower than the federal exclusion. Residents of these states could be exposed on the state level even if they are exempt federally. We practice law in Florida, and there is no state-level estate tax here. This is one of the reasons why Florida is a great place to retire.
At the same time, many people who reside in the Sunshine State moved from states in the Northeast. A number of the states in that area impose state-level estate taxes, including New York, New Jersey, and Connecticut. If you own valuable property in one of these states, the estate tax in that state could be applicable, so you should discuss the situation with an attorney if you are an out-of-state landholder.
Assets in a Trust
You may naturally assume that assets that you convey into a trust would no longer be part of your estate. This is true, but it is also false; it all depends on the type of trust that you establish.
Revocable living trusts are very popular among people who want to facilitate efficient asset transfers to their loved ones. Part of the appeal is the fact that you do not lose control of assets that you convey into the trust. If you ever need the resources, you can revoke the trust and take the assets back.
In addition to revocable trusts, there are also irrevocable trusts. Though there are certain exceptions, for the most part, you cannot revoke or dissolve this type of trust after you establish it. In legal lingo, you are surrendering incidents of ownership when you convey assets into an irrevocable trust.
Since you are no longer the owner of the assets, you would be removing them from your estate for tax purposes if you place resources into a trust that cannot be revoked. There are a number of different types of trusts that can be used to mitigate estate tax exposure.
For example, you could use a qualified personal residence trust to transfer ownership of your home at a tax discount. Many people use generation-skipping trusts to reduce transfer taxes, and there are also charitable trusts that can have positive estate tax consequences.
Your family dynamic, the nature of your assets, and your overall objectives would dictate the best course of action with regard to the overall tax efficiency strategy that you adopt.
Attend a Free Seminar
Taxation is one very important topic that you should explore when you are devising your estate plan, but there are many others. People who are not exposed to estate taxes still have a lot of choices to make, and there are many facets to consider.
If you would like to gain a solid foundation of information, attend one of our free seminars. We offer these sessions on an ongoing basis, and you can visit this page to see our schedule: Naples, FL Estate Planning Seminars.