It is very satisfying to achieve all of your financial goals. Consequently, if you have been quite successful from a financial standpoint, you have to be concerned about protecting your legacy.

The estate tax is one of many significant factors for high net worth individuals because there is a relatively high estate tax exemption. The exemption (actually called “exclusion” today) is the amount that can be transferred to anyone of your choosing before the estate tax would become applicable.

The figure is adjusted annually to account for inflation, but at the time of this writing in 2021, it is $11.7 million. This is a per-person exclusion, If you are married, you and your spouse would have a combined $23.4 million exclusion.

While we are on the subject of spouses and the estate tax, you should be aware of the fact that this exclusion is portable. In an estate planning context, the term “portability” is used to describe the ability of a surviving spouse to utilize the unused exclusion of his or her deceased spouse.

When you hear about the existence of the federal estate tax, you may come up with a logical idea to get around it. At some point in time, you could simply give gifts to your loved ones to avoid the death tax, right?

This used to be possible when the estate tax was first enacted in 1916, and a lot of people used this tactic back then. As a response, a federal gift tax was put into place a few years later to limit transfers that escaped the estate tax. It was briefly repealed, but it came back for good in 1932.

Today, in addition to the exclusion amount, there is an annual gift tax exclusion that opens the door slightly. It allows you to give limited gifts to others every year free of the gift tax.

During the current calendar year, the amount of the annual gift tax exclusion is $15,000 per person. If you are going to be exposed to the federal estate tax, you can use this exclusion to give tax-free gifts to reduce the value of your estate.

Though it is a rather limited number, it can add up if you and your spouse give gifts consistently over a number of years. To provide an example, let’s say that you have three married children. You have a $15,000 per person exclusion to utilize every year, and your spouse has one as well.

As a couple, you could give $30,000 annually to each husband and each wife, which is a total of $60,000 per family. We are talking about three different families, so you can divest yourself of $180,000 per year tax-free. If you do this for 20 years, you are looking at $3.6 million in tax-free asset transfers.

When it comes to the $11.58 million lifetime exclusion, this is a unified exclusion with the gift tax. That means any gifts that you make within a calendar year that exceed $15,000 per person will be counted against your lifetime $11.57 million exclusion.

Irrevocable Trusts

There are different types of trusts used in the field of estate planning. Some of them are revocable, and some of them are irrevocable.

If you were to establish a revocable trust, you would retain incidents of ownership. This is because of the fact that you would have the power to dissolve the trust and take back direct personal possession of the assets that you conveyed into it.

Since you retain incidents of ownership, assets in this type of trust would be part of your estate for estate tax purposes. There would be no benefit from a tax efficiency perspective.

On the other hand, assets that you convey into an irrevocable trust would not be part of your estate, because you have no access to the assets once you convey them into the trust. In some instances, you can use the annual gift tax exclusion to fund one of these trusts

Irrevocable trusts that are used for estate tax efficiency purposes include grantor retained annuity trusts, charitable lead trusts, spousal limited access trusts, qualified personal residence trusts, irrevocable life insurance trusts, and generation-skipping trusts.

Attend a Free Webinar!

Our attorneys Larry Parman, Jerry Shiles and Jeff Green are offering some fantastic opportunities for people to gain a great deal of important estate planning knowledge. We are conducting a series of webinars over the coming weeks, and we urge you to attend the session that fits into your schedule.

There is no charge, but we ask that you reserve your spot in advance, and you can do just that if you take a moment to visit this page: Oklahoma City estate planning webinars.