Home / Estate Planning / How Can You Minimize Estate Tax Liability?
by Hunter Montgomery
The federal estate tax is a looming threat for people that have been very successful from a financial standpoint because it carries a 40 percent top rate. There are many people in the Hilton Head area that have done well, and if you are among them, you should understand the facts.
Fortunately, there are steps that you can take to ease the burden if your estate is going to be exposed.
Estate Tax Parameters
Before we get into the estate tax efficiency strategies that can be implemented, we will share some broader information about the tax. The entirety of your estate is not automatically exposed to the estate tax because there is an exclusion.
This is the amount that can be transferred before the tax would be levied on the remainder, and it has changed dramatically over the last 20 years.
In 2001, it was $675,000, and it gradually rose to $3.5 million in 2009. The estate tax was repealed for one year in 2010 due to a provision in the Bush era tax cuts. It returned in 2011 with a $5 million exclusion and a 35 percent top rate.
The rate was increased to 40 percent when a fresh tax measure was enacted in 2013, and the exclusion stayed the same indexed for inflation. These parameters were in place through 2017.
In December of that year, the Tax Cuts and Jobs Act was enacted, and a provision in the measure dramatically increased the estate tax exclusion in 2018. It was $11.18 million that year, and this year, it is $12.92 million after a series of inflation adjustments.
The provision in theTax Cuts and Jobs Act that established the higher exclusion is going to expire on January 1, 2026. At that time, the exclusion is going to be reduced to $5.49 million, which is the level that was in place in 2017 before it was increased.
There is an unlimited marital deduction that gives you the ability to transfer any amount of property to your spouse tax-free if you and your spouse are American citizens. A surviving spouse would have two exclusions to utilize because the estate tax exclusion is portable.
Federal Gift Tax
In the big picture, you cannot use lifetime gift giving as a comprehensive estate tax avoidance strategy. This is because of the fact that there is a federal gift tax that is unified with the estate tax.
However, there is an additional $17,000 per year, per person gift tax exclusion. You can give this much to any number of people each year tax-free without using any of your multimillion-dollar gift and estate tax exclusion.
A married couple would be able to give a total of $34,000 annually to any number of gift recipients, and this can be part of an estate tax efficiency strategy.
Let’s say that you and your spouse have four married children together. They are eight different individuals, and as a couple, you and your spouse can give each of them a $34,000 gift each year. In so doing, you would be transferring $272,000 tax-free on an annual basis.
This in itself is beneficial, and the value of your estate is being reduced for tax purposes when you give the gifts.
Irrevocable Trusts
When you convey assets into an irrevocable trust, you are removing them from your estate. There are certain types of trusts that can facilitate asset transfers at a transfer tax discount.
These would include grantor retained annuity trusts, qualified personal residence trusts, generation-skipping trusts, and charitable lead trusts.
A family limited partnership can also be part of an estate tax efficiency plan, and this will include the utilization of the annual gift tax exclusion.
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Hunter Montgomery
Hunter Montgomery is the owner/managing attorney of the Montgomery Law Firm, LLC.He has been practicing estate planning law fsince 2002. Hunter is a member of the American Academy of Estate Planning Attorneys.
Hunter is a member of the South Carolina Bar Association, the Beaufort County Bar Association, and has served on charitable and advisory boards in the Bluffton/Hilton Head area.
Hunter graduated from Hilton Head High School. He then earned his Bachelor of Science Degree in Economics from Clemson University, in Clemson, South Carolina.
Hunter graduated Cum Laude from Regent University School of Law in Virginia Beach, Virginia, having earned a Juris Doctor Degree. He also wrote his doctorial thesis on Estate Planning Dynasty Trusts.
Hunter has called Beaufort County home for since 1984, where he lives with his wife and two children.In his spare time he dabbles in automobiles, reading history, hunting and fishing.
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About Hunter Montgomery
Hunter Montgomery is the owner/managing attorney of the Montgomery Law Firm, LLC. He has been practicing estate planning law fsince 2002. Hunter is a member of the American Academy of Estate Planning Attorneys.
Hunter is a member of the South Carolina Bar Association, the Beaufort County Bar Association, and has served on charitable and advisory boards in the Bluffton/Hilton Head area.
Hunter graduated from Hilton Head High School. He then earned his Bachelor of Science Degree in Economics from Clemson University, in Clemson, South Carolina.
Hunter graduated Cum Laude from Regent University School of Law in Virginia Beach, Virginia, having earned a Juris Doctor Degree. He also wrote his doctorial thesis on Estate Planning Dynasty Trusts.
Hunter has called Beaufort County home for since 1984, where he lives with his wife and two children. In his spare time he dabbles in automobiles, reading history, hunting and fishing.
