A primary goal of estate planning, for most clients, is minimizing or avoiding estate taxes. There is no Kansas estate tax as of 2016, but that is not true for every state. So check with your state revenue department to find out for sure. Regardless, the current federal estate tax rate is 40 percent. Now, if your gross estate does not exceed $5.49 million, as of 2016, then you will not be required to pay estate taxes. If you cannot take advantage of the estate tax exclusion, then it will be important to find a way to avoid estate taxes.
The history of estate taxes in our country
Federal estate taxes have been around since 1916. In response to the imposition of estate taxes, individuals began transferring their assets to their children, grandchildren and others, in an attempt to reduce their taxable estate. Consequently, the federal government fashioned the gift tax in order to put a stop to the rampant estate tax avoidance. In 1976, the estate tax and gift tax were combined.
The estate tax exemption through history
The estate tax exemption amount has not always been this significant. In 1997, the estate tax exemption was only $600,000. The exemption increased to $2,000,000 in 2008. Currently, in 2016, the estate tax exemption is $5.49 million but is subject to change each year. This exemption, coupled with the gift tax exclusion, referred to as the “unified credit,” makes it much simpler for most estates to avoid estate taxes altogether.
The estate and gift tax exemption or “Unified Credit”
With the unified credit, you can either leave or give away up to $5.49 million in assets from your estate, without any estate or gift tax being imposed. As long as the value of your estate is less than this amount, you can avoid federal estate taxes completely. The annual gift tax exclusion is $14,000 per recipient for each individual or a total of $28,000 per recipient when married couples combine their exclusions. If you exceed the $5.49 million lifetime exclusion amount, then your estate will be assessed taxes in the amount of 40% of the excess amount.
The lifetime credit is portable
This lifetime credit is also “portable” for spouses. This means that if your estate does reach the full exemption amount, your spouse can benefit from the remainder of that exemption. For example, if your estate is worth $2 million when you die, your spouse will be able to use the remaining $3.45 million towards his or her estate.
The unlimited marital deduction can eliminate estate taxes
There is another way to avoid paying estate taxes if you are married. Simply leave all of your assets to your spouse. No estate taxes are imposed on those assets upon your death. Instead, the taxes would only become due only upon the surviving spouse’s death. This marital deduction is unlimited, so you can essentially leave all of your assets to your spouse tax-free.
How to use a generation-skipping trust to avoid estate taxes
A “generation-skipping trust” is basically a second-generation “bypass trust.” The gift of the income created by the assets is separate from the gift of the assets themselves. This means you can include provisions in your trust that transfer a specific amount of property to your grandchildren. Meanwhile, the income from those assets is distributed to one or both of their parents. This can be established for a specified length of time or until the parents’ death. After the parents’ death, the grandchildren would then receive the income from those assets as well as, gain control over the assets themselves.
If you have questions regarding avoiding estate taxes, or any other estate planning matters, contact Gaughan & Connealy for a consultation either online or by calling us at (913) 262-2000.