A major issue for many clients, when it comes to estate planning, is trying to eliminate estate taxes. However, the reality is that most people do not ultimately have to pay estate taxes. Although the federal estate tax rate is 40%, most estates are exempt. Furthermore, as our estate planning lawyers can explain, Missouri estate taxes are no longer imposed so most clients don’t need to worry about a state estate tax.
Missouri estate taxes have been eliminated
Some clients don’t realize that no Missouri estate taxes have been imposed since January 1, 2005. In fact, there are only a few states that still impose estate tax on the state level. That means, the only estate tax liability Missouri residents would need to be concerned about is on the federal level. However, with the current federal estate tax exemption, most clients still do not need to be concerned.
Understanding the federal estate tax exemption
The federal estate tax exemption makes it so that any estate with assets valued at less than $5.49 million can be passed on tax-free. The tax exemption is also “portable,” which means that a surviving spouse of the decedent can add any unused portion of their deceased spouse’s exemption to their own. For example, if only $3,000,000 of the wife’s $5,490,000 exemption is used, then the surviving husband can choose to add the wife’s remaining $2,490,000 exemption to his own exemption. This will allow the husband to then pass on up to $7,980,000, of his estate tax free upon his death. If you have questions about this exemption, ask our estate planning lawyers.
What if I exceed the estate tax exemption amount?
Although most estates do not exceed the $5.49 million exclusion amount, your estate may be one of the few that does. If your estate value exceeds $5.49 million, then your estate will be assessed a 40 percent tax on the overage amount. The good news is that married couples can benefit from the unlimited marital deduction, which allows you to pass an unlimited amount of your estate to your spouse. There are also many other steps you can take to avoid estate taxes through the use of certain estate planning tools.
Utilizing the marital deduction to limit estate taxes
One huge benefit for married couples is the ability to give each other a gift of an unlimited amount without incurring any estate taxes. This is what is referred to as the marital deduction. The value of the property gifted to the surviving spouse is then deducted from the deceased spouse’s estate. If all of your assets go to your surviving spouse, then no estate taxes are imposed.
How the “generation skipping” tax works and why you may need it
The “generation skipping” tax is assessed on any property that is passed on to someone who is two or more generational levels below the decedent. In other words, if you give property through inheritance to your grandchildren, as opposed to your children, the federal government will impose what is commonly called the generation skipping tax. This particular tax applies to all property transfers made to someone who is unrelated to you and who is 37 ½ years or more younger than you.
Generation skipping trusts can help avoid this tax issue
The goal of a generation skipping trust is to eliminate estate taxes on transfers as much as possible, for those transfers made to successive generations. This can be accomplished by holding the assets in trust and then distributing those funds in a pre-determined manner to each generation. In this way, the entire amount of the trust is protected from estate taxes with each passing generation. However, a common misconception is that Generation Skipping Trusts are meant only for families with substantial wealth. As most estate planning lawyers recognize, most families can benefit from this type of estate planning, regardless of affluence.
The advantages of passing on your estate through gifts instead of inheritances
Another option for avoiding estate taxes is transferring your assets as gifts as opposed to inheritances. This way, you can potentially reduce the size of your estate as well as decrease the amount of taxes your estate will owe.
For instance, grandparents can give their grandchildren up to $14,000 each year to each grandchild, without incurring a gift tax. If a married couple combines their gifts, that amount can be $28,000 each year to each recipient. You can either make an outright gift, pay health care or education expenses for someone, place the money in a custodial account, or transfer the money to a trust.
If you have questions regarding individual retirement accounts, or any other estate planning matters, contact Gaughan & Connealy for a consultation either online or by calling us at (816) 974-3030.