Most of us work hard all of our lives not only to provide a decent standard of living for ourselves, but in the hope that we will have something left to leave behind for our loved ones when we die. A well thought out estate plan is a way to determine who will receive the fruits of your labor when you are gone. Estate taxes, however, can destroy your estate plans if you make the mistake of not considering the impact of those taxes on your estate ahead of time. In fact, your estate could lose almost half of its value to estate taxes if you fail to plan ahead. The best way to prevent this from happening to you and your estate plan is to work closely with an experienced Missouri estate planning attorney when you create and revise your estate plan. In the meantime though, it should also be helpful to learn a little more about federal gift and estate taxes and how they impact your estate.
What Are Gift and Estate Taxes?
In the United States, almost everything is potentially subject to taxation by the local, state, and/or federal government. The federal gift and estate tax is one of those opportunities to impose a tax. In this case, it is essentially a tax on the transfer of wealth. Because wealthy families traditionally found ways to keep the wealth in the family without subjecting it to taxation, the gift and estate tax evolved as a way to ensure that all transfers of wealth, including gifts made during your lifetime, are taxed at the time of death.
How Is the Gift and Estate Tax Computed?
The federal gift and estate tax is potentially levied on the value of all qualifying gifts made during your lifetime as well as on the value of all estate assets owned by you at the time of your death. Although the term “qualifying gifts” is used, you should assume that all gifts made during your lifetime qualify unless your estate planning attorney advises you that a gift qualifies for an exception or exclusion. To better understand how federal gift and estate taxes are calculated, assume that you made gifts to friends, family, and other beneficiaries during your lifetime valued at $5 million. Further assume that your estate assets were valued at $7 million at the time of your death. You would therefore have an estate valued at $12 million that is potentially subject to federal gift and estate taxes at the rate of 40 percent. If that were the end of the calculations, your estate would lose a staggering $4.8 million to federal gift and estate taxes! Fortunately, it is not the end of the story.
The Lifetime Exemption
The good news is that every taxpayer is entitled to exempt up to the current “lifetime exemption limit” before any federal gift and estate taxes are levied on an estate. For 2016, the gift and estate tax lifetime exemption amount is set at $5.45 million. For a married couple that means they can exempt a total of $10.9 million between them. Working with the figures from above, this means our fictitious estate is not valued at just $6.55 million for purposes of calculating the gift and estate tax liability. The estate now owes $2.62 million in federal gift and estate taxes instead of $4.8 million. While this is certainly good news, it does not mean your estate will not lose money a considerable amount of its value to the tax if you fail to plan ahead.
What Can You Do to Protect Your Estate Assets?
The most important step you can take to ensure your estate assets are protected and not lost to federal gift and estate taxes is to work with an experienced Missouri estate planning attorney when you create your estate plan. The earlier in life that you get started protecting your assets the better your odds of being able to prevent the loss of estate assets to gift and estate taxes when you die.
If you have additional questions or concerns about federal gift and estate taxes, and/or how to plan your estate to avoid the tax, contact the experienced Missouri estate planning attorneys at Amen, Gantner & Capriano, Your Estate Matters, LLC by calling (314) 966-8077 to schedule an appointment.