What Are Estate Taxes? I. What is the Death Tax?· There has been a lot of talk this week about the Trump Tax Bill, what is in it, what’s included, and in my practice this always conjures up talk about the death tax or the estate tax.· The estate tax is a tax assessed on the total value of your assets which transfer at death to heirs or beneficiaries.· As of 2025, the estate tax only applies for estates worth more than $13.99 million per individual, or $27.98 million for married couples who elect portability upon the death of the first spouse’s death.· You can leave an unlimited amount of assets at death to your spouse without incurring estate taxes. However, this means that the estate tax exemption is wasted upon the death of the first spouse. Portability permits the transfer of this unused estate tax exemption to the surviving spouse creating a $27.98 million estate tax exemption for the surviving spouse in 2025.· If you have an estate that exceeds this threshold, the excess is taxed at rates up to 40%. · If you have an estate worth $15 million, only $1.01 million above the exemption is taxable. · However, this high exemption is currently temporary. Unless Congress acts, it’s set to sunset to approximately $7 million per person starting in 2026, subjecting more estates to the estate tax. · Under the Biden Administration, there was discussion of reducing the estate tax exemption to $3.5 million. Under the new Trump Tax Bill proposal, there is discussion in making the exemption $15 million per individual in 2026 and making the exemption permanent.· Therefore, we are in this waiting period on how new estate tax legislation will affect estate planning going forward. II. State Estate Taxes and Inheritance Taxes· There are some states which impose their own estate taxes and inheritance taxes.· Unlike estate taxes, which is paid by the estate, inheritance taxes are paid by the persons inheriting the assets.· Kentucky inheritance tax can reach as high as 16%, however, close family members, such as spouse, children, grandchildren, siblings, are exempt from the inheritance tax.· It is important to watch out for inheritance taxes if your state has an inheritance tax which applies. III. How Do You Limit Estate Taxes· There are ways to limit estate taxes when your estate may be subject to estate taxes. · Lifetime Giftingo You can gift up to $19,000 per person annually without touching your lifetime exemption.o You can gift $13.99 million in taxable gifts during your lifetime. However, every taxable gift you make, reduces your lifetime exemption from the estate tax, so you need to be careful.o A couple could gift $38,000 to each child or grandchild every year· Irrevocable Trustso Transferring assets to an irrevocable trust can remove those assets from your taxable estateso One such option is with an Irrevocable Life Insurance Trust§ This is a trust in which the death benefit that pays upon your death will be owned by the ILIT.§ This can provide a cash free benefit for your beneficiaries named in the trust. However, it can also be used to provide liquidity for anticipated federal estate taxes.§ I have represented many family farms in the past, and the issue in those situations are that the estate will be taxable, but there is very little liquid assets. The surviving family would not want to sell the farm just to pay the taxes. This is where an ILIT can be very beneficial.· Charitable Givingo Donating to charities through your estate reduces your taxable estate and can offer income tax deductions.o Charitable trusts to benefit both a charity and your heirs can be especially beneficial IV. How to Plan in 2025· With the federal exemption set to be cut in half and no idea when Congress is going to act, 2025 is a critical year to act and engage in estate tax planning.· Portablity lets the surviving spouse inherit the deceased spouse’s unused estate tax exemption.· However, you must file an estate tax return to claim it.· Higher net worth families might lock in the current $13.99 million exemption before it shrinks with a Spousal Lifetime Access Trust· Don’t forget to review your plan annually – asset values can grow faster than you expect, pushing you over exemption limits.
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