Real estate values have skyrocketed over recent decades, and some people have inherited property that has been in the family for generations. Here in Oklahoma, we have a lot of farmers and ranchers who have very large tracts of land that have been passed down from generation to generation.
This is a beautiful thing, and it is an important part of the fabric of the American experience. From an estate planning perspective, you have to recognize the fact that the estate tax is looming if you are in possession of valuable real estate.
Federal Estate Tax
The federal estate tax can take a significant bite out of your legacy. This is because it carries a 40 percent maximum rate. This tax is levied on a portion of an estate that exceeds the credit or exclusion.
At the time of this writing in 2024, the exclusion is $13.61 million. This is the highest it has ever been, and it is at this level because of a provision in the Tax Cuts and Jobs Act of 2017.
We do not need to be concerned about estate taxes on transfers to your spouse because there is an unlimited marital deduction. Speaking of married people in the estate tax, the exclusion is portable. This means a surviving spouse could use their spouse’s exclusion.
Federal Gift Tax
You might think about lifetime gift giving when you hear about the estate tax. Unfortunately, that loopholes closed because there has been a gift tax in place continuously since 1932. It is unified with the estate tax, so the multimillion-dollar exclusion applies to lifetime gifts and your estate.
However, there is an additional annual gift tax exclusion that fits apart from the unified gift and estate tax exclusion. This exclusion can be used to give as much as $18,000 to any number of gift recipients with an accounting year. These gifts free of taxation without using any of your unified exclusion.
Additionally, you can pay school tuition for students without incurring any gift tax exposure. This does not include living expenses fees, and books, but you could use your annual exclusion to provide additional support in cash form.
There is also a medical exclusion. If you want to pay medical bills or health insurance premiums for someone, you will not be taxed.
Estate Tax Efficiency Strategies
If you are exposed to the estate tax, there are things that you can do to mitigate the exposure. When it comes to maintaining possession of property that has been in the family, you could establish an irrevocable life insurance trust (ILIT).
Without getting into all the minute details, the trust would hold insurance policies on your life. After your death, the proceeds could be used to pay estate taxes. If the strategy is successful, you will be able to keep the property in the family.
This is just one of the tax efficiency trusts that can be utilized by people who have estate tax concerns. The generation-skipping trust, qualified personal residence trust, and grantor retained annuity trust are a handful of the others.
Expiration of Tax Cuts and Jobs Act
As we have stated, the record-high exclusion that we have right now is in place because of the Tax Cuts and Jobs Act. That measure is going to sunset at the end of 2025. On January 1, 2026, the exclusion will revert to the 2017 level of $5.49 million indexed for inflation.
Remember, the exclusion applies to lifetime gifts along with your estate. So, you could consider giving lifetime gifts between now and the beginning of 2026 to take advantage of the current exclusion.
Take Action Today!
We can help you put a tailor-made estate plan in place even if you are not concerned about estate taxes. Different approaches can be taken, and the ideal course of action will depend on the circumstances.
When you work with us, your estate plan will be custom-crafted to ideally suit your needs. To set the wheels in motion, call our Oklahoma City estate planning office at 405-843-6100.
Our Tulsa location can be reached at 918-615-2700, and you can use our contact form to send a message to either location.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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