It’s difficult enough to have to deal with the death of a loved one without having to worry about estate taxes. However, it is an unfortunate reality that a person’s death is often a taxable event and, for some families, estate taxes are a reality that must be dealt with.
Fortunately for those for who estates taxes are a reality, there are simple estate planning strategies that can be put in place to allow you to minimize estate taxes and pass on more to your loved ones.
Will I My Estate Be Subject to the Estate Tax?
Upon your death, your estate may be subject to both federal and state-level estate taxes, depending on the state in which you live. There is no state-level estate tax in Florida. But, if you own assets in other states that have their own estate tax, your estate may be liable for the tax in that state.
Fortunately, most Floridians don’t have to deal with estate taxes at all. This is because federal estate taxes generally only affect about 2% of all Americans and were never intended to apply to the average taxpayer in the first place.
Why Should I be Concerned about the Estate Tax?
If you have been fortunate enough to accumulate a large estate, you probably want to preserve as much of this estate as possible to pass on to your heirs when you die. But, the specter of federal estate taxes can put a large portion of your estate at risk.
In fact, the federal estate tax rate is 40%. In other words, you could lose almost half of your estate to estate taxes. This means that unless you take steps to lessen or avoid this tax burden, you will have a lot less left over to leave to your loved ones.
What is Subject to Estate Tax?
The sum of all assets you own when you pass away and gifts you made during the course of your life may be subject to the federal estate tax. However, each person is entitled to a lifetime estate/gift tax exemption that will be applied before the estate tax is levied. The lifetime estate/gift tax exemption is currently $11.4 million for individuals and $22.8 million for married couples.
So, for example, if you were to die this year, and leave behind an estate worth $10 million, and also gave away $5 million in gifts to loved ones, the combined amount of your taxable estate would be $15 million. After deducting the lifetime exemption of $11.4 million, your taxable estate would be $3.6 million and your estate tax burden would be $1.44 million (40% of $3.6 million).
What if You Are Married?
The Unlimited Marital Deduction permits an unlimited amount to be transferred from your estate to your spouse at the time of your death, tax-free. However, this transfer can over-fund your surviving spouse’s estate and they can end up paying more taxes in the end. This is where the concept of “portability” become important.
What is Portability?
“Portability” refers to a surviving spouse’s ability to use any remaining portion of a deceased spouse’s lifetime estate/gift tax exemption.
So, using the example above, if you left all of your assets to your spouse, you would only need $5 million of your lifetime estate/gift tax exemption to cover the gifts you made before your death. You would then have $6.4 million left of your exemption that you could “port” to your spouse. Your spouse would then be able to exempt a total of $17.8 million ($6.4 million + $11.4 million).
What Does This Mean For Your Spouse?
Your spouse will have just inherited $10 million in assets from you. But, they will have a $17.8 million lifetime exemption available as well.
If your spouse had no assets of his or her own, they would owe nothing in estate taxes if they died the next day because they would only be taxed on $10 million, which would all be exempted under the $17.8 million lifetime exemption they had available.
However, if they had assets of their own, perhaps an additional $10 million worth, their estate would now be over-funded at $20 million. After deducting the available lifetime exemption of $17.8 million, they would then risk owing $880,000 on a $2.2 million taxable estate.
The Annual Gift Tax Exclusion
The annual gift tax exclusion permits each individual to make gifts worth up to $15,000 each year to an unlimited number of beneficiaries, tax-free. In addition, married couples may use “gift splitting” to make gifts worth up to $30,000.
Annual exclusion gifts do not count against your lifetime estate/gift tax exemption limit and gifts may be made to all types of beneficiaries, including individuals, charities, and trusts.
Logically, the more assets your spouse can transfer prior to their death, without incurring a gift tax, the better. So, if your spouse starts using the annual exclusion to make gifts to your three children and seven grandchildren, along with gifts made to two trusts that they have established, each year they will be able to transfer $180,000, tax-free.
If your spouse outlives you by ten years, they will have transferred $1.8 million out of their estate prior to their death, tax-free, reducing their taxable estate from $2.2 million to $400,000.
Thus, they will have reduced their estate and gift tax burden from $800,000 to $400,000 effectively allowing them to leave an additional $400,000 to your loved ones.
Contact Lynchard & Seely, PLLC:
Florida Estate Planning Attorneys
If you have any further questions regarding how estate tax will affect you, feel free to contact Lynchard & Seely, PLLC, either online or by calling 1-850-936-9385, to arrange a consultation with one of our expert Florida estate planning attorneys who can provide you with answers to all of your questions.
