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How can estate tax changes impact what your loved ones might owe?

by Susan Wright | Contributor
September 14, 2020

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In recent years, estate tax planning has been a concern of only very high net worth individuals. This is because of the federal estate tax exemption amount of more than $11 million per person (in 2020). But that exemption is set to expire in the year 2025, when the provisions of the 2017 Tax Cuts and Jobs Act “sunset.”

At that time, given the massive federal debt that continues to rise, it is likely that income and estate taxes will go up. But just how much these taxes may increase is unknown. That’s why it is essential to put a plan in place now that can help keep more of your assets in the pockets of your loved ones rather than in the hands of the government.

How much of your estate could be subject to tax upon death?

The federal estate tax is levied on the assets and property of those who die with estates that exceed a certain dollar amount, unless the decedent is married and his or her assets pass directly to their spouse under a provision that is known as the “unlimited marital deduction.” (At the passing of the surviving spouse, though, the assets could be subject to estate taxation.)

Historical Estate Tax Exemption Amounts and Top Tax Rates over time

For many years, the federal estate tax exemption stood at $600,000. But over the past couple of decades, the amount has increased, allowing more people to avoid this type of tax on a deceased loved one’s assets.

But that will likely change in the near future.

In some cases, the federal estate tax is just the tip of the iceberg in terms of the death taxes that an individual’s survivors may incur. For instance, as of Jan. 1, 2020, the District of Columbia and the following states had estate and/or inheritance taxes:

  • Connecticut
  • Hawaii
  • Illinois
  • Iowa
  • Kentucky
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • Nebraska
  • New Jersey
  • New York
  • Oregon
  • Pennsylvania
  • Rhode Island
  • Vermont
  • Washington

These states have differing exclusion amounts, too, ranging anywhere from $1 million to $5.74 million.

Due to these taxes alone, an estate could be reduced to less than half of its value literally overnight. But, with some good solid planning in place ahead of time, you could significantly reduce estate tax liability.

What are the best strategies for reducing – or even eliminating – estate taxes?

Depending on your specific situation and estate tax reduction goals, there are several strategies that you could use for reducing or eliminating federal and/or state estate tax liability. One method entails using life insurance to pay some or all of the taxes.

But it isn’t as simple as just purchasing a policy and having your loved ones hand over the proceeds to Uncle Sam. One reason for this is because if you own the life insurance in your personal name, the dollar amount of the death benefit can be included in the overall value of your estate, in turn, increasing the taxable amount.

Rather, an irrevocable life insurance trust, or ILIT, can be created for the purpose of either purchasing a new life insurance policy, or for owning and holding an existing policy. With the ILIT as the owner of the insurance coverage, the amount of the death benefit proceeds is removed from the value of your personal estate (and thus, is not included in the calculation of estate taxes).

Another way to reduce the value of your taxable estate at death is to “gift” money away while you’re still living. Typically, the donor of a gift is responsible for paying any of the gift taxes that are due if the gift exceeds a certain amount. According to the IRS, “any gift is a taxable gift, however, there are exceptions to this rule.”

One of these exceptions is gifts that are given to your spouse. Another includes gifts given to political organizations, as well as the direct payment of another person’s medical and/or tuition expenses. Still another exception is the dollar amount of the gift.

For example, the annual gift tax exclusion is currently (in 2020) $15,000. This means that you can give up to $15,000 to as many people as you desire without you or the recipient being subject to the gift tax. Even better yet is that if you are married, both you and your spouse may gift up to $15,000 per year each, for a total non-taxable gift of $30,000 per recipient.

Are your assets shielded from Uncle Sam?

No one knows what federal (or state) estate taxes will be in the future. So, it is important for you to plan ahead now in order to ensure that your assets pass to survivors with as little tax as possible.

Once you have an estate plan in place, though, it isn’t a “set it and forget it” endeavor. Rather, the plan should ideally be reviewed at least once per year, in order to make sure that it is up to date with any future tax changes and/or estate tax exemption amounts.

Your estate plan should be reviewed even more frequently if you have experienced any major life changes, such as marriage or divorce, the birth or adoption of a child or grandchild, and/or the purchase or sale of a business.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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