Whether you already have an estate plan in place, or you are just contemplating the creation of one, you will need to understand how inheritance taxes can impact your estate. Without careful planning, inheritance taxes can put a significant dent into the value of the estate you leave behind for your family and other beneficiaries because every dollar your estate pays in inheritance (and//or gift and estate taxes) is one less dollar that will eventually make its way to your loved ones. If you live in the State of Florida you should know if there is a Florida inheritance tax before you create your estate plan.
A Brief History of Inheritance Taxation
As you probably already know, almost everything in the United States is potentially subject to taxation by the local, state, and/or federal government. The federal gift and estate tax is essentially a tax on the transfer of wealth. Because wealthy families traditionally found ways to keep the wealth in the family without subjecting it to taxation, the federal gift and estate tax evolved as a way to ensure that all transfers of wealth were taxed at the time of death. Some states decided to get in on the action — and the income — by implementing a state inheritance tax. There is no Florida inheritance tax though. Therefore, residents of the State of Florida only need to worry about paying federal gift and estate taxes..
Understanding the Probate Process
When you die, everything in which you have an ownership interest, including both real and personal property as well as tangible and intangible assets, becomes part of your estate for the purpose of probate. Probate is the legal process that is required of all but very small estates following the death of the estate owner. Shortly after your death, the Executor of your estate must identify and locate all your estate assets and then determine which of those assets are required to be part of the probate process. Not all assets are considered probate assets. A date of death (DoD) value must then be ascertained for all probate assets. In addition, the value of all gifts made by you during your lifetime must also be calculated. The sum total of the value of all probate assets together with the value of all lifetime gifts is then potentially subject to federal gift and estate tax at the rate of 40 percent. Before any probate assets can be transferred to the intended beneficiary, any federal gift and estate tax due from the estate must first be paid out of estate assets.
The Lifetime Exemption
Prior to the passage of the American Taxpayer Relief Act of 2012, or ATRA, the lifetime exemption amount fluctuated on a regular basis, making it difficult to predict how federal gift and estate taxes would impact your estate. ATRA permanently set the lifetime exemption at $5 million; however, that figure is to be adjusted annually for inflation. Consequently, figures for the following year are released at the end of each tax year. For 2016, the gift and estate tax lifetime exemption amount is set to be $5.45 million. For a married couple that means they can exempt a total of $10.9 million between them.
Other Ways to Avoid Taxes
Other popular options used to help reduce your estate’s exposure to inheritance taxes include, but are not limited to, the following:
- Marital deduction – you are allowed to leave an unlimited amount in assets to your spouse, tax-free, when you die. This, however, often serves only to delay the inevitable because you have now over-funded your spouse’s estate. When your spouse dies, gift and estate taxes will still diminish the value of the assets left behind unless tax avoidance strategies are employed
- Annual exclusion – every taxpayer may make an unlimited number of tax-free gifts each year of assets valued at up to $14,000 using the annual exclusion. Moreover, the value of these gifts it not counted against your lifetime exemption limit. Gift splitting allows a married couple to combine their gifts to make gifts valued at up to $28,000.
- Trusts – Specialized trusts, such as the Grantor Retained Annuity Trust (GRAT) are designed to allow you transfer appreciable assets with a minimum (or no) tax liability.
For additional information, please join us for one of our upcoming free seminars. If you have additional questions about inheritance taxes, or estate planning in general, in the State of Florida please contact the experienced estate planning attorneys at Kulas Law Group, P.A. by calling 772-398-0720 to schedule an appointment.