Accumulating wealth can be challenging, and you may breathe a sigh of relief when you find that you will be able to make things easier for your loved ones after you are gone. This is well and good, but you do have to be aware of the potential impact of estate taxes.
In this blog post, we will look at the death taxes that can come into play, and we will also pass along some important information about taxation and revocable living trusts.
Federal Estate Tax
There is a federal estate tax in place, and it has been around since 1916. Every estate is not subject to the tax, because there is a credit or exclusion that allows you to transfer a certain amount of property before the tax would kick in.
There was a base exclusion of $5 million installed for the 2011 calendar year, and after the American Taxpayer Relief Act of 2012 was passed, this exclusion was made permanent. However, there have been ongoing adjustments each year since 2011 to account for inflation.
After a series of adjustments, the exact amount of the federal estate tax exclusion in 2016 is $5.45 million. You are probably going to see a somewhat higher figure each year as inflation adjustments are added.
The maximum rate of the federal estate tax is 40 percent at the present time, so we are talking about an attention-getting figure that can significantly impact your financial legacy.
Federal Gift Tax
A logical response to the estate tax would be gift giving while you are alive. People used to be able to do this for a few years after the original enactment of the death tax, but a gift tax was installed to close this loophole.
The gift tax and the estate tax are unified, and this means that the $5.45 million exclusion is a unified exclusion. It includes gifts that you give while you are living along with the value of your estate. In other words, if you gave $5.45 million in tax-free gifts while you are living using your unified exclusion, your available exclusion would be exhausted. All of your estate would be subject to the estate tax.
The estate tax exclusion is portable between spouses. This means that a surviving spouse could use his or her own exclusion and the exclusion that was afforded to his or her deceased spouse.
While we are on the subject of spouses, there is an unlimited marital transfer tax deduction. Unlimited assets can be transferred to your spouse while you are living or after you pass away free of federal transfer taxes. A caveat to this statement would be that your spouse must be an American citizen to take advantage of the unlimited marital transfer tax deduction.
State-Level Estate Tax
There are a number of states in the union that have state-level estate taxes. We practice law in the state of New Jersey, and there is a state-level estate tax in our state. At the present time, the New Jersey state estate tax exclusion is $675,000. As a result, you could be exempt from the federal estate tax, but exposed to the New Jersey state estate tax.
We should point out the fact that there is a marital deduction on the state level as well. You can transfer unlimited assets to your spouse without incurring any New Jersey state estate tax liability.
Revocable Living Trusts
Now that you understand the lay of the land when it comes to death taxes, we can look at revocable living trusts. These trusts are useful for a wide range of people, but they do not provide estate tax efficiency, unless a Credit Shelter Trust is added.
Since this type of trust is revocable, you retain incidents of ownership when you establish and fund a revocable living trust. For this reason, assets that are held by revocable living trusts are part of your estate for tax purposes.
However, there are different types of trusts that can provide estate tax efficiency. These would be irrevocable trusts. Generation-skipping trusts, grantor retained annuity trusts, qualified personal residence trusts, and charitable lead trusts are some of the trusts that can be used for tax efficiency purposes.
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Revocable living trusts are not going to provide estate tax efficiency, but if you are not exposed to death taxes, this type of trust could be a good choice for you. On the other hand, if your estate is in taxable territory, you should consider the utilization of a wealth preservation trust.
Our doors are open if you would like to discuss your situation with a licensed estate planning attorney. To schedule a consultation, call us at (908) 222-8803 or send us a message through our contact page.