How can my estate plan lower the federal transfer tax liability?
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UPDATED: Jan 23, 2019
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Every individual can make tax-free gifts during the course of his or her lifetime, or bequests at death, up to $11.4 million for 2019 (up from $11.18 in 2018). (The estate and gift tax exclusion amounts are tied to inflation.) This means you pay no federal estate tax unless your estate exceeds $11.4 million (less prior taxable gifts), should you die in 2019. (The base exemption amount — which is adjusted annually for cost of living increases–was boosted significantly by the 2017 Tax Cuts and Jobs Act for tax years 2018 through 2025. Beginning in 2026, the base exemption amount is scheduled to revert to 2017 levels.)
For those who are married, there is an unlimited marital deduction. All estate taxes can be avoided upon the death of the first spouse to die. But the surviving spouse would have to remarry and give his/her entire estate to the new spouse in order to get another unlimited marital deduction. Most people would rather their children or other relatives benefit from the estate, rather than a new spouse and his/her family.
An estate plan can take advantage of certain tax avoidance techniques for those who have accumulated some wealth; this gives more of your property to your intended beneficiaries, instead of giving it to the federal government. Some of these techniques include:
(1) a tax by-pass trust to hold property for your children, while still providing for your surviving spouse during his/her lifetime
(2) distribution of share in a Family Limited Partnership to take advantage of minority and lack of marketability valuation discounts
(3) a gift program to take advantage of the current $15,000 per year per person gift tax exclusion so as to prevent a greater tax in the future in the form of an estate tax
(4) an irrevocable trust to handle and manage property outside of your estate, so that the property is not part of your estate at the time of death.
Tax planning as part of estate planning can, depending on the size of one’s estate, save hundreds of thousands to millions dollars – if it is done right.