The realm of estate planning is intricate, with many nuances to consider, and central to this is the topic of the Estate Tax Exemption. In this article, we aim to provide a clear understanding of the exemption, shedding light on its various aspects and recent developments.
The U.S. government has established an Estate Tax that applies to the estates of deceased individuals. Presently, each grantor is entitled to an exemption of $12.92 million. This signifies that if the total value of your estate is below this threshold, it is not subject to the federal estate tax. For estates valued above this exemption, the excess amount is taxable, which can influence the inheritance received by beneficiaries. The current tax rates in 2023 are:
|
Tax rate |
Taxable amount |
Tax owed |
|
18% |
$0 to $10,000. |
18% of taxable amount. |
|
20% |
$10,001 to $20,000. |
$1,800 plus 20% of the amount over $10,000. |
|
22% |
$20,001 to $40,000. |
$3,800 plus 22% of the amount over $20,000. |
|
24% |
$40,001 to $60,000. |
$8,200 plus 24% of the amount over $40,000. |
|
26% |
$60,001 to $80,000. |
$13,000 plus 26% of the amount over $60,000. |
|
28% |
$80,001 to $100,000. |
$18,200 plus 28% of the amount over $80,000. |
|
30% |
$100,001 to $150,000. |
$23,800 plus 30% of the amount over $100,000. |
|
32% |
$150,001 to $250,000. |
$38,800 plus 32% of the amount over $150,000. |
|
34% |
$250,001 to $500,000. |
$70,800 plus 34% of the amount over $250,000. |
|
37% |
$500,001 to $750,000. |
$155,800 plus 37% of the amount over $500,000. |
|
39% |
$750,001 to $1,000,000. |
$248,300 plus 39% of the amount over $750,000. |
|
40% |
$1,000,001 and up. |
$345,800 plus 40% of the amount over $1,000,000. |
To put it simply. Every dollar that your beneficiaries inherit above $1,000,000 higher than the Estate Tax Exemption is subject to a 40% estate tax, and any other ordinary income taxes that may be due.
There has been much speculation about whether the Estate Tax Exemption will revert to its pre-2016 amount. That amount was $5.45 Million per Grantor which is significantly lower than it currently is. If a reversion happens, it would mean more estates would be vulnerable to the tax, causing concern among estate planners and potential grantors alike. As of this writing, no concrete decisions have been made, leading to a sense of uncertainty.
A common misconception is that certain assets, like Roth IRAs and Life Insurance, do not count towards the Estate Tax Exemption amount. While Roth IRAs themselves are not taxable, and while Life Insurance proceeds themselves are not taxable, the idea that they don't participate in the Estate Tax Exemption is not true. Virtually all assets, regardless of their nature, count towards the total estate value when determining estate tax liability. This misunderstanding can lead to poor planning and potential financial pitfalls.
A. Irrevocable Trusts: An irrevocable trust is a robust tool in estate planning. Once assets are transferred into such a trust, they are no longer considered part of the grantor's taxable estate, potentially reducing its value and minimizing estate tax liability. The trust's irrevocable nature means that, under most circumstances, its terms can't be changed without the consent of the beneficiary.
B. Family LLCs: Creating a Family Limited Liability Company (LLC) is another viable option. It allows assets to be transferred to the LLC, which is then split among family members as a form of shares. Often, the value of these shares (especially minority shares) is discounted, which effectively reduces the value of the estate.
C. Tax-Deferred Assets in Irrevocable Trusts: Investing in tax-deferred assets like Life Insurance and Annuities within an irrevocable trust can be advantageous. These instruments can grow tax-deferred, and when structured correctly, the payouts might avoid ongoing trust tax rates.
Estate planning, especially around the topic of the Estate Tax Exemption, is multifaceted. Given its complexity, it's paramount to employ a trio of experts: a Tax Planner, Fiduciary Advisor, and an Estate Attorney. Each plays a unique role in ensuring your estate is structured optimally, safeguarding your assets, and ensuring your beneficiaries are well-cared-for.
Planning for the future can be challenging, but with the right team and a clear understanding of the estate tax landscape, you can navigate these waters with confidence.