While the federal estate tax exclusion is currently larger than it has ever been at $5.43 million for individuals and $10.86 million for couples because of the portability of unused exclusion amounts, some families still face the challenge of reducing their estate to avoid estate taxes. Because the top estate tax rate on amounts above the exemption is 40%, you can see why those with large estates are concerned.
First and foremost, families in this situation should work closely with an attorney experienced in estate planning for high-net worth individuals. While a qualified financial adviser is helpful in planning asset transfer to heirs, an attorney experienced in estate tax law is key for making sure documents are structured properly.
One of the simpler estate planning moves families with excessive wealth may consider is gifting. Individual taxpayers are permitted to gift up to $14,000 per year, per individual without incurring a gift tax. For married couples, that amount doubles if both spouses consent to gift splitting. While an informational gift tax return will need to be filed, tax will not be due provided the gift is under the annual exclusion limit.
Beyond gifting money to individuals, you can pay for medical care, insurance premiums and education costs provided the money is paid directly to the institution or service provider. For example, you could pay for your child, grandchild or other heir to attend Harvard at $45,278 for tuition for the 2015-2016 school year and give the individual up to $14,000 during the year. Additionally, you can also pay for any medical expenses incurred during the year.
If your heirs are not yet college-age, you may consider “power-funding” a 529 Plan. 529 College Savings Plans offer a unique feature that allow you to contribute a lump sum—up to $70,000 per beneficiary—and then elect to treat the contribution as if it were made over a five year period for gift tax purposes. Assets immediately leave your estate, but if should you die before the fourth year, a portion of the contribution will be included in your estate.
If your heirs are beyond college age, you may consider working with an attorney to fund a Grantor Retained Annuity Trust (GRAT.) A GRAT allows you to transfer rapidly appreciating or income-producing property to heirs while retaining an interest in the property over a set term, from two to 20 years. As the grantor, you are making an irrevocable, taxable gift to the beneficiaries; however, the value of the taxable gift is discounted by your retained interest. Taxes owed on the gift to a GRAT can be partially or fully offset by the grantor’s applicable lifetime gift tax exclusion amount.
The trust then pays the grantor a taxable income stream from the assets, based on an interest rate set by the IRS. Ideally, the assets in the trust grow at a higher rate than the annuity stream and the excess growth will pass to the remainder beneficiaries gift tax free.
These are just a few strategies to consider when looking to reduce your estate. Additionally, estate and gift tax laws are subject to change. An attorney who specializes in tax law should be able to create strategies that will work best for your situation and should be able to accommodate any changes in law. Having an experienced attorney is vitally important. If you have questions regarding how any of these gifting strategies may fit into your overall financial plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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