Gift and Estate Taxes – the Basics

When you sit down to create your comprehensive estate plan one of the primary goals you will likely have is to create a plan that reduces your estate’s exposure to federal gift and estate taxes. The reason for this is simple – every dollar your estate must pay in gift and estate tax is a dollar that is not available to support and provide for your loved ones after you are gone. In order to fully understand why avoiding gift and estate taxes is so important though, it helps to have a better understand of the tax itself. Only an experienced North Carolina estate planning attorney can answer specific questions about how federal gift and estate taxes will impact your estate plan; however, the following provides an overview of how the tax could affect you and your estate.

At the time of your death, everything you own, or I which you have an ownership interest, will become part of your estate. This includes both real and personal property and well as tangible and intangible assets. Unless your estate qualifies for a small estate alternative, your estate will need to go through the formal probate process. The purpose of probate is twofold. First, probate serves as a mechanism by which your estate assets are identified, valued, and legally transferred to the intended beneficiaries or heirs of your estate. Second, probate allows the government to make sure all tax obligations are fulfilled before those assets change hands. Primarily, this means the payment of any federal gift and estate tax due from the estate.

Shortly after your death, all of your estate assets must be identified and inventoried by the Executor of your estate if you appointed one in a Last Will and Testament or by a Personal Representative appointed by the court if you died intestate, or without leaving beyond a valid Will. Date of death values must also be ascertained for all estate assets along with the value of all gifts made during your lifetime. The combined total of your estate assets and lifetime gifts is then potentially subject to gift and estate tax.

Each taxpayer, however, is entitled to exempt up to the “lifetime exemption limit” before the tax is actually levied. Thanks to the American Taxpayer Relief Act (ATRA) of 2012, the lifetime exemption limit was permanently set at $5 million, adjusted annually for inflation. For 2016, the limit is $5.45 million. Therefore, for the year 2016, only the value of estate assets and lifetime gifts valued at over $5.45 million will be taxed. ATRA also established the permanent gift and estate tax rate at 40 percent. Let’s see how the tax actually works.

Imagine that you left behind an estate this year valued at $5million. You also made gifts during your lifetime valued at $3 million, for a total of $8 million. After you exempt the lifetime exemption limit you have a taxable estate of $2.55 million. ($8,000,000 – $5,450,000 = $2,550,000) The federal gift and estate tax due from your estate would be $1.02 million. ($2,550,000 x 0.40 = $1,020,000)Losing $1.02 million to Uncle Sam is not a preferred outcome for anyone. That’s over $1 million that could have gone to your loved ones. This is why tax avoidance is a common estate planning goal. How can you reduce your estate’s exposure to gift and estate taxes? The best way is to start planning early on in your life and to work closely with an experienced North Carolina estate planning attorney. There are a number of estate planning tools and strategies that can be incorporated into your estate plan to help limit the amount of tax levied on your estate after your death. Remember, every dollar you save in gift and estate taxes is another dollar available to help provide for your loved ones when you are no longer here to provide for them yourself.

For additional information on the subject of estate taxes, please join us for one of our upcoming seminars. If you have additional questions or concerns about your own estate plan, contact the experienced North Carolina estate planning attorneys at Clarity Legal Group® by calling (919) 484-0012 to schedule an appointment.