Believe it or not, today’s federal income tax rates are actually quite low, compared to where they have been throughout the last century. In fact, in 49 of the past 107 years, these tax rates have been 70% or more.
On the other hand, at $11.58 million per person (in 2020), the estate and gift tax exemption has never been so high. So, if you are looking for a tax-efficient way to transfer assets in the future, making lifetime gifts could be a solution – but only if this strategy is implemented in the right way.
Throughout our entire lives, taxes can play a key role. For instance, tax is oftentimes charged on the items and services that we purchase. They are also either deducted or paid, based on the amount of income we earn.
In some cases, Uncle Sam can actually reap more of the benefit from your hard work than you or your loved ones do. So, it is important that you are not just aware of your potential tax liabilities, but that you also plan ahead for them.
When it comes to income, there are various deductions and credits available that can reduce the amount of taxes that you owe (or that can increase your tax refund). But what about estate or asset transfer taxes?
Given the high rate of the gift tax exemption today, many financial professionals are suggesting that investors make lifetime gifts in order to reduce the size of their taxable estate. But, if you fall into this category, it is better to do so sooner rather than later, because it is anticipated that the amount of this exemption will be reduced in the future.
Based on the unlimited marital deduction, a married individual is allowed to pass any amount of his or her assets to their spouse free of taxation. However, at the death of the second spouse, the net amount of assets that is passed to the survivors can be reduced significantly due to both federal and state estate taxes.
According to the IRS, the estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interest in at the time you pass away.
These items could include some or all of the following:
Current estate planning law (as of 2020) allows for the exemption of $11.58 million per person. However, if you (and your spouse) hold a significant amount of assets above this amount, it could make sense to start gifting them away.
One option for doing so is to simply “gift” cash, investments and/or other items of value directly to others for the purpose of reducing the amount of your taxable estate. The law now allows individuals to gift up to $15,000 annually to an unlimited number of recipients. So, if you are married, you and your spouse together could give non-taxable gifts of up to $30,000.
Another way to use lifetime gifting for reducing your taxable estate is to directly make payments of tuition and/or medical expenses on behalf of another individual. This can also be accomplished free of the federal gift tax.
In addition to simply lowering the amount of your taxable estate, gifting away assets can also reduce the future appreciation of those assets, which can work to keep the amount of your taxable estate at death lower.
Although making lifetime gifts can have many advantages, though, there are also some items to consider before moving forward. For instance, if you gift away assets or property (prior to your death) that have appreciated, the recipient will take on your original cost basis – and this could result in him or her incurring a higher tax in the future when they sell or give the asset away.
Also, in addition to federal estate taxes, there are some states that also impose state estate tax and/or an inheritance tax. These states include (in 2020) Washington, Hawaii, Oregon, Minnesota, Vermont, Maine, New York, Massachusetts, Rhode Island, Connecticut, Nebraska, Iowa, Illinois, Kentucky, Pennsylvania, New Jersey and Maryland. Washington, D.C., is also on this list.
Making sure that loved ones and other entities (such as charitable organizations) receive as much as possible in the future can take some advanced planning. But with the wrong strategy in place, it could actually increase the tax liability on your estate.
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.