One of the most common goals of estate planning is tax avoidance. To understand why this is such a common goal, and why you may wish to include it in your estate plan, you first need to understand what the federal gift and estate tax is and how it is calculated.
When you die, everything that you own at the time of death and everything you have an ownership interest in, becomes part of the your estate. All of these assets are then valued as of the date of death. The sum total of all estate assets is then used to calculate federal gift and estate taxes. Some states also have an equivalent tax; however, all estates are potentially subject to the federal gift and estate tax. Wisconsin currently does not have an estate tax.
Along with the value of your estate assets at the time of your death, the value of all qualifying gifts you made during your lifetime are also included in gift and estate tax calculations. Assume, for example, that at the time of your death you owned assets valued at $4 million but you also made qualifying gifts during the lifetime valued at $2.25 million, your gift and estate tax liability would be calculated on $6.25 million. With a maximum tax rate of 40 percent you could lose almost half of your estate to taxes; however, your estate will not actually be taxed on the entire $6.25 million thanks to the lifetime exemption.
Each taxpayer is entitled to exempt up to the lifetime exemption limit before gift and estate taxes are incurred. Until recently, the lifetime exemption limit fluctuated wildly. The American Taxpayer Relief Act, or ATRA, of 2013 permanently set the lifetime exemption limit at $5 million, adjusted annually for inflation. For 2013, the limit is $5.25 million. In our hypothetical, this means that $5.25 million would first be deducted from the value of your estate, leaving just $1 million on which the gift and estate tax would be levied. Therefore, your estate would lose $400,000 to gift and estate taxes. While this is still a significant loss, it is certainly better than it would be without the lifetime exemption.
There are numerous ways in which you can decrease your estate’s exposure to federal gift and estate taxes. Be sure to consult with your estate planning attorney to learn more. Visit our website at KH-LAW.NET to schedule your FREE consultation today.