Working hard, saving regularly, and investing wisely will certainly ensure that you amass a moderate to large estate; however, if you fail to protect the assets that make up your estate your beneficiaries will ultimately lose out in the end. One of the most potentially devastating threats to your estate assets is the federal gift and estate tax. The Lincolnshire asset protection planning attorneys at Hedeker Law, Ltd. explain what you need to know about gift and estate taxes in order to protect your hard-earned assets.
Federal Gift and Estate Tax Basics
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. By way of illustration, assume that you made gifts during your lifetime totaling $6 million in value. At the time of your death, you owned assets valued at $14 million. The combined total of $20 million would be subject to federal gift and estate taxes. Although the federal gift and estate tax rate fluctuated historically, the American Taxpayer Relief Act of 2012 (ATRA) permanently set the rate at 40 percent. Without any deductions or adjustments, that $20 million estate would owe $8 million in federal gift and estate taxes.
2018 Changes to the Lifetime Exemption
Every taxpayer is entitled to make use of the lifetime exemption to reduce the amount of gift and estate taxes owed by their estate. ATRA set the lifetime 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 after that. Under the new law, the exemption amounts increased to $11,200,000 for individuals and $22,400,000 for married couples (see “portability” below). 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. With the current changes to the lifetime exemption in place, that same $20 million estate would now only pay gift and estate taxes on $8.8 million, reducing the amount of federal gift and estate taxes to $3,520,000. The temporary increase in the lifetime exemption amount presents an opportunity for those with significant taxable assets to transfer more of that wealth without incurring taxes over the next few years.
Tax Avoidance Strategies
Paying just over $3 million in taxes is undoubtedly better than an $8 million tax obligation; however, incorporating tax avoidance strategies into your estate plan could further reduce that tax obligation. The annual exclusion, for example, allows every taxpayer to make gifts of up to $15,000 to an unlimited number of beneficiaries without incurring a tax obligation. Moreover, gifts made using the annual exclusion don’t count toward your lifetime exemption. Imagine, for example, if you make annual gifts to six beneficiaries for 20 years. You could transfer $1.8 million tax-free.
Factoring in Portability
ATRA also made the concept of portability permanent. Portability refers to a surviving spouse’s ability to use any unused portion of a deceased spouse’s lifetime exemption. In our example, there was $5.2 million left of the lifetime exemption after deducting the amount transferred in lifetime gifts from the lifetime exemption ($11.2 million – $6 million = $5.2 million). The decedent’s surviving spouse would be entitled to add that $5.2 million to his/her lifetime exemption amount. For 2018, that would mean the surviving spouse would have a combined lifetime exemption amount of $16.4 million ($11.2 million + $5.2 million = $16.4 million) The surviving spouse’s estate would not incur federal gift and estate taxes until the value exceeded $16.4 million as a result.
The Illinois Estate Tax
A handful of states, including the State of Illinois, also impose a state gift and estate tax. In Illinois, however, the exemption amount is considerably lower at just $4 million. Therefore, an estate valued at $4 million or more must file an estate tax return even though deductions and adjustments may reduce the estate’s value down enough to avoid paying estate taxes. Unlike its federal counterpart that is set at 40 percent, the estate tax rate in Illinois varies up to 28.5 percent.
Contact Lincolnshire Asset Protection Planning Attorneys
For additional information, please join us for an upcoming FREE seminar. If you have additional questions or concerns regarding gift and estate taxes in the State of Illinois, contact the experienced Lincolnshire asset protection planning attorneys at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.