Along with deciding who will receive your estate assets when you die, another important goal of a comprehensive estate plan is to minimize the amount of taxes your estate owes when you die. In order to do that, you must have a general idea of how much in estate assets you can transfer at death tax-free.
In Missouri, your estate assets are potentially subject to federal gift and estate assets when you die. Each individual, however, is entitled to exempt up to the lifetime exemption limit for gift and estate taxes. The American Taxpayer Relief Act of 2013 set the lifetime limit at $5 million though that figure is adjusted yearly for inflation. For 2013, the limit was $5.25 million. This does not necessary mean that your estate can have assets valued at that amount at the time of your death though because eligible lifetime gifts also count toward the limit. Assuming, for instance, that you gifted assets valued at $2 million prior to your death and your estate assets were valued at $5 million at the time of your death, your estate would still incur gift and estate taxes on $1.75 million ($2 million + $5 million – $5.25 million = $1.75 million). Taxable assets are then taxed at the rate of 40 percent – a significant rate for any estate.
There are, of course, strategies that can help you limit your estate’s exposure to gift and estate taxes in Missouri. First, only assets owned by you at the time of death, or the value of assets gifted prior to death, are taxable. Strategic gifting during your lifetime can often allow you to transfer assets that are expected to appreciate in value before they actually appreciate, therefore removing them from estate before they increase in value.
In addition, you may be able to use a portion of your deceased spouse’s lifetime exemption limit because of the “portability” provision of the tax law. For example, if your spouse died prior to you, and he or she only used $2 million of his or her lifetime exemption limit, you may be entitled to use the remaining $3 million (or more) when you die. In this example, portability would increase your lifetime exemption limit to over $8 million.
You may also wish to make use of the yearly exclusion available to all taxpayers. This lets you gift up to $14,000 to as many beneficiaries as you wish each year without those gifts counting toward your lifetime exemption amount. You may increase the value to $28,000 through gift-splitting if you are married and combine your exclusion amounts.
Talk to your estate planning attorney about strategies you can use to decrease your exposure to gift and estate taxes.