Developing a sound estate plan while you are healthy can go a long way toward saving your estate and family members from significant tax liabilities after you pass away. However, estate planning is not a one-and-done activity. Rather, it is an on-going process that requires frequent review and modifications based on changes to both your personal circumstances and evolving tax laws.
With the passage of the Tax Cuts and Jobs Act and temporary doubling of the estate tax exemption for tax years 2018 through 2025, only a small number of high-net-worth individuals have been subject to the 40 percent federal estate tax. Because the results of the 2021 election may impact the future of this generous exemption, now is the time to meet with your financial advisors to plan very carefully, not just for the year ahead, but also for the purposes of ensuring your estate maintains longer-term tax efficiency and meets your unique family needs and goals.
Under the IRS’s recent cost-of living adjustments for 2021, individuals may transfer up to $11.7 million in assets to their heirs during life or at death without incurring federal estate or gift taxes, up from $11.58 million in 2020. Married couples filing joint tax returns may shield up to $23.4 million from federal estate tax in 2021. It is important to remember that this exemption applies only at the federal level, and some states do not follow federal laws. Depending on the state where you live, you still may owe estate and inheritance taxes.
One way to reduce exposure to federal and state estate tax is to remove assets from your taxable estate by making annual gifts to others. For 2021, the annual gift tax exclusion remains at $15,000 for individuals, or $30,000 for married couples filing joint tax returns. Consequently, married couples filing jointly may gift up to $30,000 tax-free to as many people as they choose during the calendar year. As an example, an individual taxpayer may remove $60,000 from his or her taxable estate in 2021 by gifting $15,000 to each of his or her four children. Married taxpayers filing joint returns can make four gifts of $30,000 for a total of $120,000. In addition, the tax laws allow you to use your annual gift tax exemption to pay for the medical expenses, private school tuition and/or college education of another person only if you make those payments directly to the health care provider or school. Payments made directly to a patient or student will have gift tax consequences.
Under the tax laws, there are no limits on the amounts that spouses may gift to each other when both are U.S. citizens. However, for 2021, the maximum amount a U.S. citizen may gift to his or her non-U.S. citizen spouse tax-free is $159,000.
Estate planning generally requires consideration of the federal income tax rates and their impact on and your heirs both during your life and long after you are gone. For example, assets in your estate during your lifetime are subject to federal income tax rates, with are currently as high as keeping assets in your estate during your life can expose you to federal income tax rates as high as 37 percent, plus a 3.8 percent Medicare tax, as well as 20 percent tax on long-term capital gains. In addition, trust income exceeding $13,050 in 2021 may also be subject to the highest 37 percent tax rate, which can be a significant tax burden on the trust. Alternatively, you may gift assets to a beneficiary or other individual in a lower tax bracket and ultimately give the federal government less of your hard-earned money.
About the author: Todd A. Moll, CFP®, CFA, is a director and chief investment officer with Provenance Wealth Advisor (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email firstname.lastname@example.org.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Todd A. Moll is a registered representative of and offers securities through Raymond James Financial Services, Inc., Members FINRA/SIPC.
Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. You should discuss any legal or tax matters with the appropriate professionals. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
Please note that changes in tax laws may occur at any time and could have a substantial impact upon each person’s unique situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.