ESTATE Tax Planning

Who pays the Estate Tax?

Estate tax, sometimes referred to as the “Death Tax”, is an important element of estate planning. If the total amount of net assets that you leave for your heirs exceeds a certain threshold amount (“Applicable Exclusions Amount”), the Federal government will levy and collect the estate tax. In other words, your heirs will receive your assets less the tax to the government.

How much assets do I need to have before I worry about the estate tax?

For individuals, if your estate’s value is under the Applicable Exclusion Amount, you do not worry about estate tax liability (that is if you were to die in that particular year). In 2019, the exclusion amount is $5,700,000 (increased with inflation from 5,590,000 in 2018). A husband and wife can enjoy a total of $11,400,000 estate tax exclusion in 2019 (with appropriate planning).
California does not have a state estate tax regime. However, if you live in other states, your estate may have to pay both Federal Estate Tax and State Estate Tax.

Exactly which of my assets will be included in my estate for “estate tax calculation” purposes?

Everything you own will be included and counted to determine whether or not your estate will have to pay the government a hefty estate tax.

You might be surprised to learn that all life insurance policies that you own will be included in you estate, when calculating your total estate for estate tax purposes. So your life insurance policy you purchased for protection of your loved ones, may actually cost your estate an expensive tax if you don’t use a special planning technique.

Do I pay taxes on life Insurance?

The answer may be YES, depending on total amount of your assets. Life insurance proceeds will be added to your other assets to determine whether or not your total estate is under or over the exemption amount. For example let’s assume you own a life insurance policy in the amount of $4,000,000 and you also own other assets worth $5,000,000. If death occurs in 2019, the IRS will treat your estate as owning $9,000,000. If you are unmarried, the first $5,700,000 is exempt from tax, but the balance ($9,000,000 – $5,700,000= $3,300,000) will be subject to the top marginal rate of 40% or $1,320,000 estate tax liability.

Also, all of your retirement plans and any property you may have inherited from anyone, will be also included in your estate and will be counted for estate tax liability purposes.

How about giving away my assets during my life?

You may “give away” (gift) your assets in two ways:
In 2019: you may give away $15,000 per person to as many individuals as you like without incurring gift tax liability. By doing so, you can trim your estate somewhat.

Can I give away more than $15,000 to an individual in 2019?

You may give away as much as you like. You may give away a total of $5,700,000 in 2019 without tax liability and use up to 100% of your Estate Tax Exclusion Amount if you wish (provided you have not given away or gifted any of your assets before). A husband and wife can gift/give away a total of $11,400,000 in 2019 without tax liability (if they have not gifted any of their assets before).

However, this example is not designed to encourage anyone to give away substantial assets for various tax and non-tax reasons. This example is for illustration purposes only. Just remember, we only have one (1) exemption, not two exemptions. Lifetime Gift Tax exemption is the same as Estate Tax Exemption. Therefore, you can either use your exemption during your lifetime by gifting away your assets to your loved ones or you may keep all of your assets and transfer them to your heirs after your death. Either way, the total exemption is the same. There are substantial advantages and disadvantages of gifting your assets during your lifetime (which should be a major discussion with your estate planning attorney).

Does the annual allowance of $15,000 use up the $5,700,000 exclusion?

No. The annual gift tax exemption amount of $15,000 per person (Donee) is in addition to your lifetime gift/estate tax exclusion amount of $5,700,000 in 2019. In other words, even if you give away (gift) $15,000 to 10 individuals (totaling $150,000), you still have $5,700,000 lifetime gift/estate tax exemption to utilize.

So is gifting of all types of assets appropriate?

It may or may not be beneficial for you and your loved ones to engage in lifetime gifting. For instance, if you are planning to give away (gift) real estate to your family members, it would be to your best interest to seek professional advice, because by doing so, you may be  creating or enlarging other tax liabilities for your loved ones (especially if the real estate appreciates in value after the gifting).

So life insurance adds to the value of my estate, thus possibly creating a tax liability. Is there any way to make my life insurance tax-free?

Remember we are not talking about “income tax”, since most life insurance proceeds are income tax free. We are talking about the largest tax ever that most taxpayers are not aware of and are not accustomed to paying. We are talking about “estate taxes” or “death tax” that will only come into play when we have die and our heirs will have to deal with it. So the question is, can we make our life insurance “estate tax free” for our heirs, and the answer is YES, absolutely we can.  There are advanced strategies and vehicles such as Irrevocable Trusts by which you can enjoy all the benefits of your life insurance policies and at the same time, make the death benefits Estate Tax free for your beneficiaries upon your death. Otherwise, if you do not create these special trusts and simply purchase a life Insurance policy (with you as the owner of policy), your beneficiaries (heirs) may end up paying 40% estate taxes on the amount of your life insurance policies, depending on total value of your estate at the time of death.

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