Are you aware that, currently, the federal estate tax is something very few Americans need to worry about? Right now, the exclusion is approximately $11.5 million per individual person or $23 million for a married couple. There are, however, a few reasons that you may begin to wonder if you need to engage in more careful tax planning when it comes to the estate tax. One reason may be that the current federal limits expire at the end of 2025 and may revert to their prior, lower levels at that time, or could be lowered earlier than the set expiration date by the current presidential administration. The other is that you may live in a state with an estate tax exemption that is far lower than the federal limit. Let us go over three tips to keep in mind if you are nearing the tax exemption limits for the estate tax.
1. Create an Irrevocable Trust. Different types of irrevocable trusts can exclude your assets from being subject to estate tax if you are nearing the limits. If you are just at the point where estate tax becomes a worry, you can opt to put in as little as you need to so that you do not go over the limit. The downside may be that once you put money into an irrevocable trust, you cannot get it back. Popular choices for irrevocable trusts include Spousal Lifetime Access Trusts (SLATs) and Life Insurance Trusts (LITTs). In a SLAT, one spouse, the donor, makes a gift to the trust for the benefit of the other, non-donor, spouse. Any appreciation of assets gifted to the trust will be excluded from the estate of both spouses for tax purposes. In a LITT, you may set up the trust and direct that your life insurance proceeds eventually be paid into the trust, to shield the insurance money from becoming part of your taxable estate.
2. Make Gifts to Family and Friends. If you are close to, but not at or above, the current estate tax exemption limit, you might consider making annual gifts to your heirs. A married couple can gift up to $30,000 and an individual can gift up to $15,000 annually to any individual recipient free of tax. If you have two children and four grandchildren, you can give this amount to each of them annually, which might ultimately add up to enough to keep you under the limit.
3. Keep Abreast of Changing Limits. Whatever strategy you choose, stay current on the estate tax limits at both the federal and state level. If you have two homes in two different states and one state gets rid of or lowers its exemption, you might consider making that state your primary residence.
For assistance addressing these important estate planning issues and more, our office is here to help. Please contact us to schedule a meeting time.