The Significance of Estate Size: Understanding the Impact and Planning Ahead

Size matters.

Yes, indeed, when it comes to your estate, its size holds significant implications, not only for you and your beneficiaries but also in the eyes of lawmakers and regulators. In the United States, the belief in the importance of estate size is reflected in the imposition of estate taxes, a subject that demands attention as we approach significant changes in the tax landscape.

Estate tax, a levy imposed on the transfer of property upon one's death, becomes applicable if the fair market value of your estate surpasses a certain threshold.

Currently set at $13.6 million per person (double for married couples), this threshold is scheduled to decrease by 50% in approximately 600 days, reaching around $7 million in January 2026.

The implications are clear

If you transfer assets during your life that are in excess of the "lifetime gift limit", you face gift taxes.

If assets are transferred from your estate after your death, they may face an "estate tax", on any amounts that are in excess of the gift law limit.

Moreover, it's crucial to note that the estate includes not only tangible assets but also assets like life insurance policies in your name or shares in a privately-owned company, are also included in the estate size.

In light of these upcoming changes, there's a growing urgency for strategic estate planning. I would even call it the need to develop a Philanthropic Estate Plan? - one that incorporates private foundations in addition to wills and trusts, because donations to a private foundation are NOT included in the "gift tax computation".

Lawmakers are actively encouraging individuals to consider making large gifts before the impending reduction in the estate tax threshold.

By transferring assets directly to beneficiaries or through intermediate entities like irrevocable trusts, individuals can effectively reduce their taxable estates.

Let's illustrate this with a couple of examples:

Example 1: Bob's Strategic Planning

Bob, an entrepreneur and investor, currently has a net worth of $13 million, primarily consisting of real estate investments and insurance policies.

Recognizing the impending changes in estate tax laws, Bob decides to gift $9 million worth of real estate and insurance to an irrevocable trust in 2024.

By staying within the current $13.6 million limit, Bob's transfer faces no gift tax.

After his death, his estate size would be reduced to $13-$9 = $4m (which is also within the new $7m limit that will kick-in).

He would not face "gift taxes" for transfers made while he is alive, nor would his estate face "estate taxes" after his death.

Example 2: Delayed Planning

Contrastingly, if Bob delays his estate planning until 2026, his estate continues to grow unchecked.

The same $9m gift to the irrevocable trust would be subject to a gift tax, $2 million that's in excess of the new limits would be subject to a gift tax (40%).

But this reduces his estate size to 4m, which would be under the new limit, if he were to pass away after making the gift to the irrevocable trust.

Example 3: Neglected Planning

In a scenario where Bob neglects estate planning entirely and passes away in 2027, his $13 million estate faces estate taxes on the excess amount, subjecting his beneficiaries to significant financial implications.

$13 - $7 = 6m would be subject to 40% federal estate taxes.

REMEMBER - this article only covered federal gift and estate taxes.

There's also income tax, capital gains tax, inheritance tax, and probate cost, in addition to state estate taxes which BOB has to be aware of.

Conclusion

In conclusion, understanding the nuances of estate planning and the upcoming changes in tax laws is paramount.

By proactively managing estate size and leveraging strategic planning techniques, individuals can preserve wealth for future generations and mitigate tax liabilities.

How many of you are aware of these nuances and have taken steps to navigate the evolving tax landscape?

If you want to read more about these topics and understand what's required to legally and ethically circumvent some of these taxes ...

Visit our website: lawandtaxfoundation.com (free legal workshops and help)

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