The federal estate tax can have a heavy impact on your legacy if your estate will be subject to taxation. It carries a whopping 40 percent maximum rate, and it is imposed on the portion of an estate that exceeds the exclusion.
We will look at the details here, and we will place an emphasis on the things that can be done to ease the burden.
Current 2023 Estate Tax Parameters
For the rest of this calendar year, the estate tax exclusion is $12.92 million. Each year, there are adjustments to account for inflation, so it will be higher next year. Given the rate of inflation at the present time, the increase will be on the high side compared to some other years.
There is no estate tax levied on transfers between spouses because there is an unlimited marital deduction. However, it is only available to American citizens. The estate tax exclusion is portable, so a surviving spouse can use their deceased spouse’s exclusion.
The gift tax is unified with the estate tax, so the $12.92 million exclusion or exemption is a unified exclusion. It applies to your estate and large gifts that you give while you are living.
We do not have a state-level estate tax here in Arizona. However, there are 12 states that have their own estate taxes. If you own valuable property in one of these states, it would apply to your estate if the value of the property exceeds the exclusion in that state. This is something to look into if you own valuable property out-of-state.
Estate Tax Efficiency
If the estate tax will impact your estate, there are things that you can do to ease the burden. Even though the unified exclusion applies to lifetime gifts, there is a separate annual exclusion.
Each taxpayer can give up to $17,000 to an unlimited number of recipients each year tax-free. To be clear, you would not be using any of your unified exclusion to give a gift to an individual that does not exceed $17,000 in value.
Utilization of this exclusion can be part of a tax efficiency strategy. For example, if you are married, you and your spouse could combine your respective exclusions to give $34,000 gifts to all of your children and their spouses each year.
These transfers would be tax-free, and you would be reducing the overall value of your estate in the process. This is always going to be a logical step, but there is a particular amount of urgency right now.
The present exclusion is a product of a provision in the Tax Cuts and Jobs Act of 2017. It doubled the $5 million indexed for inflation exclusion that was in place since 2011. This provision is going to expire or sunset at the end of 2025.
At that time, the exclusion is going back down to the $5.49 million that was in place in 2017. As a result, you have a limited window of opportunity. You can give lifetime gifts while the exclusion is still at this record-high level.
Certain types of irrevocable trusts are also used by people who want to limit their estate tax exposure. These would include the generation-skipping trust, charitable lead trust, grantor retained annuity trust, irrevocable life insurance trust, and personal residence trust. You could consider funding a trust while the exclusion is at this high level.
Ready to Act?
We are here to help if you are ready to work with a Phoenix, AZ estate planning lawyer to put a plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 888-222-1328.
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