A well thought out estate plan does much more than simply decide what happens to your estate assets at the end of your life. It also protects those assets and helps them grow over the course of your lifetime. One of the many factors a successful estate plan must take into consideration is the impact federal gift and estate taxes will have on your estate. Fortunately, every taxpayer is entitled to make use of the lifetime exemption which limits your estate’s exposure to gift and estate taxes. The Phoenix estate planning attorneys at Morris Hall PLLC explain the lifetime exemption and its effect on your estate.

The Federal Gift and Estate Tax

The federal gift and estate tax is effectively a tax on the transfer of wealth that is collected from your estate after you die. Every estate is potentially subject to federal gift and estate taxes. The tax applies to all qualifying gifts made during a taxpayer’s lifetime as well as all estate assets owned by the taxpayer at the time of death. To illustrate how the tax works, assume that you are single and made qualifying gifts during your lifetime valued at $5 million. In addition, at the time of your death, you owned assets valued at $12 million. The combined total of $17 million would be used to determine your estate’s exposure to federal gift and estate taxes. The federal gift and estate tax rate fluctuated historically; however, the American Taxpayer Relief Act of 2012 (ATRA) permanently set the rate at 40 percent. Without any deductions or adjustments, that $17 million estate would owe $6.8 million in federal gift and estate taxes.

Incorporating the Lifetime Exemption

Whether you leave behind an estate valued at $17,000 or $17 million, losing almost half of it to federal gift and estate taxes would certainly not be desirable. Moreover, it would discourage people from saving, and passing down, wealth to future generations. The good news is that the tax doesn’t apply to all estates once the lifetime exemption is incorporated into the calculations. Every taxpayer may deduct the lifetime exemption amount from his/her estate before the federal gift and estate taxes are calculated. In other words, your estate will only owe federal gift and estate taxes if the combined value of lifetime gifts and assets owned at the time of death exceeds the lifetime exemption amount.

Like the tax rate, the lifetime exemption amount fluctuated until ATRA set exemption amount at $5 million, to be adjusted for inflation each year. For 2018, the lifetime exemption amount would be $5.49 million for an individual and $10,980,000 for a married couple; however, President Trump signed tax legislation into law that changed the lifetime exemption amount for 2018, and for several years to come. Under the new law, the exemption amounts are now $11,200,000 for individuals and $22,400,000 for married couples. These exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation.

Using the example above for a single person, the $17 million estate would only owe taxes on $5.8 million after the lifetime exemption is deducted. The tax due to Uncle Sam would be reduced from $6.8 million to $2.32 million thanks to the lifetime exemption. For a married couple with a properly drafted estate plan, there would be no estate taxes.

Although almost all gifts made during your lifetime count toward your lifetime exemption limit, there is one notable exception that you should make use of if you have an estate that is likely to be subject to federal gift and estate taxes. The yearly exclusion allows each taxpayer to make annual gifts valued at up to $15,000 (for 2018) to an unlimited number of beneficiaries without those gifts counting toward the lifetime exemption. Married couples can combine their exclusion and make gifts valued at up to $30,000. Over the course of several years, you can transfer a significant percentage of your wealth out of your estate without being taxed for those transfers using the yearly exclusion.

Contact Phoenix Estate Planning Attorneys

For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about the lifetime exemption, or about federal gift and estate taxes in general, contact the experienced estate planning attorneys at Morris Hall PLLC by calling 888-222-1328 to schedule your appointment today.