Dealing with estate taxes is, on the one hand, a pain in the neck, but, on the other hand, if you don’t qualify for an exemption then congratulations — you’re doing very well. In 2019, the Tax Cuts and Jobs Act raised the exemption to $11.4 million. However, for married couples, that exemption is essentially doubled to ($22.8 million).
These numbers will be adjusted for inflation until 2025 at which point the Tax Cuts and Jobs Act will need to be renewed. If you’re a married couple whose estate is worth less than $22.8 million, then that just about all you need to know. Additionally, estate values passed between spouses are not taxable.
If your estate is valued at more than $22.8 million, then there is a 40% flat tax for anything over the $22.8 million threshold. This is something you will want to know when planning your estate for transfer to your heirs.
Estates Under $11.4 Million
While estates under $11.4 million aren’t subject to taxes, married couples should still review their estate plan if they have dependent children or want to leave specific assets to a specific person. Additionally, trusts can be set up for the benefit of special needs children or older relatives. You still have a number of options to consider.
Exemption Portability of Estates Between $11.4 Million and $22.8 Million
Exemption portability, while not a new concept, allows married couples to essentially double their exemption. Estates that are dissolved through death can have the unused portion of their exemption transferred to a living spouse which is something to keep in mind as you plan for your passing.
How Big Estates Can Plan to Limit Their Tax Burden
The portability of exemptions is one thing to keep in mind. Let’s say you have an estate valued at $20 million. You die, leaving the entirety of your estate to your wife. This is tax-free since transfers between spouses are untaxed. You can also pass on the unused $11.4 million exemption to your wife which gives her a total of $22.8 million in estate tax exemptions. When she dies later that year, she can vest the entire $20 million estate to your heirs tax-free.
In addition, there are other moves that you can make to reduce your overall tax burden. These include:
Making annual gifts
Annual gifts essentially reduce the overall value of your estate for tax purposes. As of today, there is an exclusion of up to $15,000. Amounts gifted over $15,000 are subject to a reduction in the overall amount of unified federal estate and gift tax exemption over your lifetime. However, $15,000 gifts can be given to multiple different parties reducing the taxable value of your estate by a large margin.
College tuition and medical expenses
These can be paid for without having to reduce your unified federal estate and gift tax exemption at all.
Give away appreciating assets
If you have not used your unified federal estate and gift tax exemption ever, you can give away assets in the amount of $22.8 million before they become a part of your taxable estate. This is something to consider if you’re looking to reduce the overall taxability of your estate when it passes to your heirs.
Irrevocable life insurance trusts
While life insurance premiums may be written off your income taxes, they are included in the overall value of your estate when you pass it on. That is — so long as you can exercise control over the policy, change beneficiaries, cancel the policy, or borrow against the policy. One way around that is to name your spouse as the beneficiary. Since transfers between spouses are nontaxable, it won’t matter. Another way is to establish an irrevocable life insurance trusts that purchase coverage for both spouses. Since the insurance policies are property of the trust, they are not considered a part of the overall value of the estate and can be used to cover estate taxes or other liabilities of the estate.