Estate planning for high-net-worth individuals will involve wealth preservation. The federal estate tax carries a 40 percent maximum rate, so it can consume a significant portion of your legacy.
There are steps that can be taken to reduce your exposure if the tax will be a factor for your family. We will explain them here, but first, you should understand the broader estate tax parameters.
Transfer Tax Details
The vast majority of Americans do not have to be concerned about the estate tax because it is only applicable on the portion of an estate that exceeds the exclusion. It stands at $12.06 million in 2022, and clearly, most people will not pass away with this much property.
We practice in the Hilton Head area. There are many wealthy people in our community, and your real estate is part of your estate for tax purposes. Another relevant element is the imminent reduction to the estate tax exclusion.
This high exclusion that we have now is a product of a provision in the Tax Cuts and Jobs Act that was enacted in 2017. During that calendar year, the exclusion was $5.49 million, and it was raised $11.18 million for 2018.
At the beginning of 2026, the provision will sunset, and the exclusion will revert back to the $5.49 million figure indexed for inflation.
There is an unlimited marital deduction, so transfers to your spouse are not subject to taxation if they are an American citizen. A surviving spouse may use the exclusion that could have been used by their deceased spouse, so they can combine two exclusions.
We also have a federal gift tax that is unified with the estate tax. You would be using some of your unified exclusion to give lifetime gifts, and this would reduce the exclusion that could be applied to your estate.
Lifetime Gift Giving
In addition to the unified lifetime exclusion, there is an annual gift tax exclusion. You can give $16,000 or less to any number of gift recipients each year free of transfer taxes.
If you give a gift to someone that exceeds $16,000, you would be using a portion of your unified exclusion to give the gift tax-free. There is no limit to the total amount of money you can transfer tax-free as long as you do not give anyone more than $16,000 in a particular year.
A married couple can combine their respective exclusions and give $32,000 per person tax-free each year. If you give the gifts for a sustained period of time, you can transfer a significant amount of property in a tax-free manner.
You will remove assets from your estate for tax purposes if you transfer resources into an irrevocable trust. There are different types of irrevocable trusts that are used for tax efficiency purposes, and one of them is the qualified personal residence trust.
To implement this strategy, you convey your home into the trust, and you establish a retained income period. You live in the home rent-free as usual during this interim, so there are no sacrifices and there are no recognizable changes to the day-to-day routine.
Your home is no longer part of your estate after you convey it into the trust, and you would name a beneficiary to inherit the property after the term expires. When the asset transfer takes place, the gift tax would be applicable.
However, the taxable value would be much lower than the actual value of the home. The IRS would calculate the taxable value of the gift based on the fact that the recipient will not be receiving it for a number of years.
This will reduce the taxable value of the home, so it will be transferred at a reduced rate.
Another wealth preservation trust is the generation-skipping trust. You would make your grandchildren the beneficiaries, and your children would be skipped. After your passing, your children could accept distributions from the trust and utilize property that is owned by the trust.
The estate tax would not be applied during that generation. After the death of your children, your grandchildren would inherit the assets. At that time, the estate tax would kick in, but there would be one instance of taxation across two generations.
These are two of the estate tax efficiency trusts that can be used, and there are a number of others.
Schedule a Consultation Today!
Whether you are exposed to the estate tax or not, we can work with you to develop a custom crafted plan that ideally suits your needs. If you are ready to get started, you can schedule a consultation at our Bluffton, SC estate planning office if you call us at 843-815-8580.
There is also a contact form on this site you can fill out if you would prefer to send us a message.
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