Estate Tax Planning in Florida
Serving Clients & their Families in St. Petersburg, Florida and the Surrounding Areas
HOW ABOUT SOME GOOD NEWS FOR A CHANGE?Historically speaking, the federal estate tax is an excise tax levied on the transfer of a person’s assets after death. In actuality, it is neither a death tax nor an inheritance tax, but more accurately a transfer tax. There are three distinct aspects to federal wealth transfer taxes that comprise what is called the Unified Transfer Tax: Estate Taxes, Gift Taxes, and Generation-Skipping Transfer Taxes. Legal planning to avoid or minimize these transfer taxes is both a prudent and an important aspect of comprehensive estate planning. The most recent iteration of the federal estate, gift, and generation-skipping transfer tax was signed into law by President Trump on December 22, 2017, as part of the Tax Cuts and Jobs Act of 2017 (TCJA 2017). There are a few things you ought to know about this law which took effect on January 1, 2018. Specifically, you should know the “numbers” governing transfers subject to estate, gift, and generation-skipping transfer taxation. A regular visit with Mastry Law to discuss your estate planning helps ensure that your estate plan will still work as originally designed and provides an opportunity to make any needed course corrections based on your present situation and your future goals. We have a checklist of items to review about your estate plan, but you may also have a few questions like:
Federal Estate Tax ExemptionA $5 million exemption, as indexed for inflation, was signed into law on December 17, 2010, under the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (TRA 2010). By 2017, the federal estate tax exemption had risen to $5.49 million per individual due to the inflation feature (and a nearly “automatic”* $10.98 million for married couples who follow very specific requirements at the death of the first spouse). With the stroke of his pen on December 22, 2017, President Donald Trump increased this exemption to $11,200,000 per individual (and $22,400,000 for married couples). For 2020, that exemption is increased to an inflation-adjusted $11,580,000 per individual (and $23,160,000 for married couples). The tax rate for amounts above what can be exempted remains at 40%. *See “Portability” below for more on this.
Lifetime Gift Tax Exemption and Annual Gift Tax ExclusionThe TCJA 2017 continues the concept of a unified exemption that ties together the gift tax and the estate tax. This means that, to the extent you utilize your lifetime gift tax exemption while living, your federal estate tax exemption at death will be reduced accordingly. Your unified lifetime gift and estate tax exemption in 2017 was $5.49 million and is now the same as the federal estate tax exemption of $11,580,000 per individual (and $23,160,000 for married couples). Likewise, the top tax rate is 40%. Note: Gifts made within your annual gift exclusion amount do not count against your unified lifetime gift and estate tax exemption. So, how much is this annual gift exclusion? The annual gift exclusion remains at $15,000 due to its inflation adjustment in 2018. This is up from $14,000 for 2017. Married couples can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $30,000 to as many individuals as they choose each year, whether both spouses contribute equally, or if the entire gift comes from one spouse. In the latter instance, the couple must file an IRS Form 709 Gift Tax return and elect “gift-splitting” for the tax year in which such gift was made.
Generation-Skipping Transfer Tax ExemptionSo, what is this GSTT? Basically, it is a transfer tax on property passing from one generation to another generation that is two or more generational levels below the transferring generation. For instance, a transfer from a grandparent to a grandchild or from an individual to another unrelated individual who is more than 37.5 years younger than the transferor. Properly done, this can transfer significant wealth between generations. The amount that can escape federal estate taxation between generations, otherwise known as the Generation-Skipping Transfer Tax Exemption (GSTT) is unified with the federal estate tax exemption and the lifetime gift tax exemption at $11,580,000 per individual (and $23,160,000 for married couples, subject to certain specific requirements). As with estate and gift taxes, the top GSTT tax rate is 40%.
*“Portability”The American Taxpayer Relief Act of 2012 (ATRA 2012), made “permanent” a new concept in estate planning for married couples, ostensibly rendering traditional estate tax planning unnecessary. This concept, called “portability,” means that a surviving spouse can essentially inherit the estate tax exemption of the deceased spouse without use of “A-B Trust” planning. As with most tax laws, however, the devil is in the details. For example, unless the surviving spouse files a timely (within nine months of death) Form 709 Estate Tax Return and complies with other requirements, the portability may be unavailable. However, an automatic six month extension of time to file the return is available to all estates, including those filing solely to elect portability, by filing Form 4768 on or before the due date of the estate tax return. In addition, married couples will not be able to use the GSTT exemptions of both spouses if they elect to use “portability” as the means to secure their respective estate tax exemptions. Furthermore, reliance on “portability” in the context of blended families may result in unintentional disinheritances and other unpleasant consequences. If you are concerned about how your current estate and gift planning may function in light of TCJA 2017, and thereafter, then we encourage you to schedule a consultation.
Do I need a Roth IRA?
When it comes to estate planning, Roth IRAs provide one huge advantage over other tax-favored retirement accounts. If you die, your heirs can dip into an inherited Roth account without owing any federal income tax, as long as the account has been open for more than five years! So open a Roth account now to start that five-year clock ticking. Should federal income tax rates go up in the future, funds in your Roth IRA will remain unaffected. As an added bonus, a Roth IRA in your name is exempt from the required minimum distribution (RMD) rules. These rules usually require you to begin taking taxable withdrawals from other types of tax-favored retirement accounts — like traditional IRAs — after reaching age 70½. With those accounts, fail to withdraw the proper RMD amount for a year you will owe Uncle Sam a penalty on the difference between the amount you should have taken out and what you actually took out (if anything). However, with a Roth IRA, you can keep the balance undisturbed for as long as you want and continue to earn federal-income-tax-free income and gains. When you pass away, your Roth IRA balances can be left to your heirs. They are then allowed to withdraw the money federal income tax free.
You can take advantage of salary reduction contributions to a tax-favored employee benefit account to reduce your taxable income, as well as your federal and state income taxes.
What are you waiting for?
If you have not created a comprehensive estate plan and evaluated the impact of various taxes on your estate, then you need to speak with the experienced estate planning attorneys at Mastry Law, P.A. sooner rather than later.