Estate tax efficiency is very important for some people. There is an estate tax on the federal level, and it can have a significant impact on your financial legacy.
This tax carries a 40 percent maximum rate, so we are talking about a noticeable bite.
At the time of this writing in 2014, the estate tax exclusion is $5.34 million. The first $5.34 million that you transfer to people other than your spouse can be transferred tax-free.
There is an unlimited marital estate tax deduction. This allows you to leave any amount of money to your spouse free of the estate tax. You would be using a portion of your $5.34 million exclusion to leave tax-free bequests to people other than your spouse.
Trusts and Estate Tax Efficiency
There are different types of trusts that are used in the field of estate planning. Some trusts are useful for people who want to gain estate tax efficiency, and some are not.
Revocable living trusts are very widely utilized by a wide range people. These trusts facilitate asset transfers outside of the legal process of probate. This process can be time-consuming and expensive, so people sometimes take steps to avoid it.
When you have a revocable living trust in place, you can in fact revoke or rescind the trust at any time. If you were to revoke the trust, the assets would once again become your direct personal property.
The person who creates a revocable living trust can actually act as the trustee and the beneficiary, so total control is retained.
Because you do not surrender control of assets that you place into a revocable living trust, this type of trust does not provide estate tax efficiency. Assets that are contained in a revocable living trust would be part of your taxable estate.
In addition to revocable trusts, there are also irrevocable trusts. If you were to create an an irrevocable trust, you would be surrendering incidents of ownership, because you cannot revoke the trust. The assets are owned by the trust.
Because you no longer control the assets in this type of trust, they do provide estate tax efficiency. Generally speaking, assets that have been conveyed into an irrevocable trust would not be looked upon as part of your estate for tax purposes.
Generation-skipping trusts, qualified personal residence trusts, grantor retained annuity trusts, charitable lead trusts, and charitable remainder trusts are some of the irrevocable trusts that are used for estate tax efficiency purposes.
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In addition to the federal estate tax, we have a state-level estate tax in the state of Connecticut. The Connecticut estate tax exclusion is just $2 million, so you could be exempt from the federal tax and exposed to the state death tax.
If you would like to discuss tax efficiency strategies with a licensed professional, contact us through this link to schedule a free consultation: Hartford CT Estate Planning.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
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