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Understand how gift and estate taxes work to fully comprehend why tax avoidance strategies are commonly employed in estate planning.
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To understand why tax avoidance strategies are commonly employed
in estate planning you need to understand how gift
and estate taxes work first
All gifts made during your lifetime, as well as all assets owned by you at the time of death, are potentially
subject to gift and estate taxes
Anything you give away for which you do not receive full consideration in return is a gift
Certain types of gifts are excluded
Because of the lifetime exemption and yearly exclusion most gifts of small value are not
actually taxed
Value of lifetime gifts plus value of assets owned at death are added together and then
potentially taxed
Historically fluctuated every few years
American Taxpayer Relief Act of 2013, or ATRA, permanently set the gift and estate tax
rate at a maximum of 40 percent
The unlimited marital deduction allows a taxpayer to transfer assets
of unlimited value to a spouse during the taxpayers’ lifetime or at the time of death without incurring
gift and estate taxes
For illustration purposes, imagine that Thomas and Ellen are married at the time of Ellen’s death on January 1st, 2014
Ellen owned assets valued at $5 million when she died and made a total of $2 million worth of
qualifying gifts during her lifetime
Thomas also owns $5 million in assets
Ellen can leave all of the assets she owned at the time of her death to Thomas without Ellen’s
estate having to worry about gift and estate taxes
Thomas’s estate may be overfunded though after the gift
Each taxpayer is entitled to exempt a specific amount of gifts and
assets over the course of a lifetime from gift and estate taxes
Lifetime exemption has fluctuated wildly over the years
ATRA set it at $5 million, adjusted for inflation each year
Exemption amount is $5.34 million for 2014
Thomas now has an estate valued at $10 million
$4.66 million would be taxed at 40 percent
Thomas’s estate would owe $1,864,000 in estate taxes
ATRA also made the concept of portability permanent
Allows taxpayer to use any unused portion of a spouse’s lifetime exemption
Thomas could exempt an additional $3.34 million by using Ellen’s unused exemption
Thomas cannot use the full $5.34 million because Ellen made lifetime gifts valued at $2
million
Brings Thomas’s taxable estate down to just $1.32 million
Brings the tax liability down from $1,864,000 to just $528,000
The annual exclusion allows each taxpayer to make gifts valued at up to $14,000 (for 2014) to as many
beneficiaries as the taxpayer wishes each year without incurring
a gift tax
Married couples can combine gifts (gift-splitting) to gift assets valued
at up to $28,000
Annual Exclusion gifts do not count toward the
LIFETIME EXEMPTION LIMIT
Assume Thomas lives an additional ten years
Assume Thomas used the annual exclusion to make yearly gifts to the couple’s three children
and five grandchildren
Thomas could annually gift $112,000 for a total of $1.12 million tax-free
Brings his taxable estate down to just $200,000
By employing gift and estate tax avoidance strategies the amount of tax due on Thomas’s estate was reduced
from $1,864,000 to $80,000, a savings of $1,784,000 –
money that will go to Thomas and Ellen’s loved ones instead of to the IRS
Had they started earlier they might have been able to avoid gift and
estate taxes entirely
Click to visit: www.NashBeanFord.com
445 US Highway 6 East, Geneseo, IL 61254Phone: (309) 944-2188
5030 38th Street, Suite 2, Moline, IL 61265Phone: (309) 762-9368
