Creating a successful estate plan requires you to do more than just decide how your estate assets are to be distributed after you are gone. In order to ensure that you have assets left to distribute, your estate plan should also help grow your assets during your lifetime and protect them after you are gone. One significant threat to your assets is the impact federal gift and estate taxes could have on the estate you leave behind. A Westport estate planning attorney at Nirenstein, Horowitz & Associates, P.C. explains how the 2020 lifetime exemption can help you protect your estate assets.
Understanding Federal Gift and Estate Taxes
The federal gift and estate tax is essentially a tax on the transfer of wealth. Both transfers made during a taxpayer’s lifetime in the form of a gift and transfers made at the time of death in the form of an inheritance are subject to the tax. Historically, the estate tax rate fluctuated on a yearly basis; however, with the passage of the American Taxpayer Relief Act of 2012 (ATRA) the tax rate was permanently set at 40 percent. That means that absent any deductions or adjustments to your estate’s value, you could lose 40 percent of that value to federal gift and estate taxes.
Calculating the Federal Gift and Estate Tax
The federal gift and estate tax is a tax that is levied on the combined value of all qualifying gifts made during your lifetime and the value of all estate assets owned at the time of your death. Almost all gifts are considered “qualifying gifts.” For example, imagine that you made gifts to children and other loved ones during your lifetime worth a combined total of $5 million. At the time of your death, you owned assets with a total value of $10 million. The combined total of $15 million would potentially be subject to federal gift and estate taxes. Without any further adjustments, your estate would lose a staggering $6 million to federal gift and estate taxes!
The Lifetime Exemption
The good news is that the federal gift and estate tax doesn’t impact every taxpayer. Instead, each taxpayer is entitled to make use of the lifetime exemption to reduce the amount of gift and estate taxes owed by their estate. ATRA set the lifetime exemption amount at $5 million, to be adjusted for inflation each year. President Trump, however, signed tax legislation into law that changed the lifetime exemption amount for 2018 and for several years to come. Under the new law, the exemption amounts increased to $11.58 million for individuals and $23.16 million for married couples for 2020. These exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation. That $15 million estate would only be taxed on the amount over the lifetime exemption amount, or $3.42 million. That still means that the estate would lose almost $1.4 million in estate taxes. Nevertheless, if your estate is likely to exceed the ATRA lifetime exemption amount, it would be in your best interest to consult with your estate planning attorney now in order to take advantage of the higher lifetime exemption amount before it reverts back to the pre-2018 amount.
Contact a Westport Estate Planning Attorney
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about the federal gift and estate tax and/or the lifetime exemption as applied to that tax, contact an experienced Westport estate planning attorney at Nirenstein, Horowitz & Associates, P.C.by calling (860) 548-1000 to schedule an appointment.