We are going to look at some assets transfer methods that can potentially save your family a lot of money. But before we share some information about federal estate tax efficiency strategies, we have to explain the tax from an overview.
Estate Tax Parameters
There is federal estate tax credit or exclusion that allows you to transfer a certain amount tax-free. Any portion of an estate that exceeds this figure would potentially be subject to the estate tax.
In 2023, the estate tax exclusion is $12.92 million. There are adjustments to account for inflation each year, so next year the number will be somewhat higher if there are no changes to existing laws. The maximum rate of the estate tax is 40 percent.
If you are married, you can leave unlimited assets to your spouse tax-free as long as your spouse is a United States citizen. The estate tax exclusion is portable, so a surviving spouse would have their own exclusion and their deceased spouse’s exclusion to utilize.
There is a federal gift tax that is unified with the estate tax, so the exclusion applies to gifts that you give while you are living along with your estate. However, the first $17,000 you give to any number of people in a calendar year would be exempt from the federal gift tax.
We should point out the fact that there is a state-level estate tax in New York as well, and the exclusion is just $6.58 million.
Estate Tax Efficiency Strategies
The simplest thing that you can do to reduce your estate tax exposure would be to take advantage of this $17,000 per person annual exclusion.
Since it is allotted to each individual taxpayer, you and your spouse could combine your exclusions to give up to $34,000 to unlimited gift recipients each year. In tax parlance, this is referred to as the practice of “gift splitting.”
To provide an example, let’s say that you and your spouse have four married children. You could give $34,000 to each husband of each wife for a total of $68,000 per couple. When you multiply this by four, you would be transferring $272,000 each year tax-free.
Incidents of Ownership
Irrevocable trusts of various different kinds are used to mitigate estate tax exposure. When you convey assets into this type of trust, you are surrendering incidents of ownership, so they are no longer part of your estate.
Qualified Personal Residence Trust (QPRT)
One commonly used device is the qualified personal residence trust. To implement this strategy, you sign the home over to the trust, and you name a beneficiary. You decide on a period of time during which you will continue to live in the home rent-free. This is sometimes called the retained income period.
When you transfer the home into trust, you are removing it from your estate for tax purposes. However, you would be giving a taxable gift to the beneficiary.
When the IRS determines the taxable value of the gift, they will take the retained income period into account. No one would pay the fair market value for a home that they could not occupy for a certain number of years.
As a result, the taxable value would be far less than the actual value of the property when it is transferred to the beneficiary. This is just one of many possibilities, and we will look at the others in future blog posts.
Schedule a Consultation Today
Whether you have estate tax concerns or not, we are here to help if you are ready to put an estate plan in place.
As you can see, there are different approaches that can be taken, and the ideal choice will depend upon the circumstances. We can gain an understanding of your situation, make recommendations, and help you create a plan that ideally suits your needs.
If you are ready to take action, you can set up a consultation with our attorney after you watch our estate planning webinar. You can reach us at (212) 973-0100 or you can send us a message through our contact page.