In my experience, one of the initial questions from clients is what can I do to minimize estate taxes? In many cases, clients initially express an interest in creating a trust based on the notion that it is needed to minimize taxes. While there are many types of advanced planning trusts which are intended to remove assets or appreciation from a person’s taxable estate, the benefits of a standard revocable living trusts commonly used in estate planning typically does not include avoidance of estate taxes because any assets transferred to a revocable living trust remain in the settlor’s (the person creating the trust) gross taxable estate.
What is an estate or death tax? Seems like a sick joke, right? A final toll collected by the grim reaper as one marches to the darkness. In reality, the estate tax, sometimes also called the “death tax”, is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or in which you have “incidents of ownership” on your date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your “Gross Taxable Estate”, and such amount less exclusions, credits and deductions make up your “Taxable Estate.” The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. The current top estate tax rate is a devastating 40%. In addition, lifetime gifts can be added back to the taxable estate in cases where a person has exhausted their unified exclusion discussed below.
The good news is that most estates are not subject to an estate or death tax due to the unified gift and estate tax exclusion. Everyone is essentially allowed an amount they can transfer during their life and upon their death which will not be taxable, or which is deducted from their taxable estate. As of 2023, the amount is $12,920,000. On January 1, 2026, absent congressional action, this exclusion amount will sunset and revert to the pre 2017 Tax Cuts and Jobs Act exclusion amount. The reduced amount is anticipated to be around $7,000,000, adjusted for inflation. Spouses are often able to double this exclusion by using a bypass trust or, as of January 1, 2011, surviving spouses can elect portability to transfer any unused exclusion amount of their predeceased spouse by filing a timely Form 706. Spouses are often able to transfer their entire exclusion due to the unlimited marital deduction which allows a spouse to leave an unlimited amount of wealth to their surviving spouse tax free. Using portability or a bypass trust, married couples can combine their unified exclusion and transfer a massive $25,840,000 tax free.
In addition to the federal estate tax, some states levy their own death tax. North Carolina repealed its estate tax in 2013. Additionally, a few states have an inheritance tax which is slightly different than an estate death tax in that it is taxed against the recipient of an inheritance as opposed to the estate from which it is derived. North Carolina does not have an inheritance tax.
As one can see, the answer for many North Carolinians is that their estate will likely not be subject to estate taxes; however, the answer is never a final one as the estate tax is a moving target. In the 90s, the federal unified gift and estate tax exclusion was only $600,000. While it is unlikely to ever return to such level, it could certainly be greatly reduced if a bill were to garner enough congressional support.
It is important to have an attorney who focuses on estate planning and who will be aware of any major changes to the unified exclusion. If your estate will likely exceed the unified exclusion, there are many strategies which can be employed to reduce your taxable estate such as gifting in amounts under the annual gift tax exclusion, charitable giving, grantor retained annuity trusts which can remove significant gain from your taxable estate on assets which outperform the 7520 rate, spousal gifting and spousal lifetime access trusts, and many others. Additionally, the use of an irrevocable life insurance trust can supply liquidity outside of your taxable estate to pay for any unavoidable estate taxes.
When meeting with your estate planning attorney, keep in mind the importance of providing an accurate valuation of your gross estate. If your estate planning attorney asks information about the value of your estate, it is not to be nosy or gatekeep their clientele, it is typically to analyze the type of planning which is necessary and to determine whether advanced planning for minimizing estate taxes may be necessary.
To speak with an estate planning attorney, please call our offices.