Estate Taxes (“Death Tax”) as applied to Florida residents and explained by Jacksonville estate planning attorney
Frequently Asked Questions About Estate Taxes
1. Who has to pay federal estate taxes, or 'death taxes'?
Depending on the value of the assets you own or control when you die, your estate may have to pay federal estate taxes (Florida does not have a separate estate tax) before your assets can be fully distributed to your loved ones, beneficiaries and heirs. Federal estate taxes are different from, and in addition to, Florida probate expenses (some of which can be avoided with a properly funded revocable living trust) and final income taxes (on income you receive in the year you die).
Federal estate taxes are expensive (historically, 35-55%, for 2016 the rate is 40%) and they must be paid in cash, usually within nine months after you die. Since few estates have this kind of cash, estate assets often have to be liquidated. But if you plan ahead, you can reduce and even eliminate estate taxes. Ultimately, the federal estate tax is a “voluntary tax” that can be legally avoided with proper estate planning. If you would like to meet with an experienced estate tax planning attorney to learn how you can reduce or eliminate federal estate taxes, please contact us at Info@TheColemanLawFirm.net, or call us at 904-448-1969 or toll free at 1-866-510-9099.
In 2008, the last year that figures are available from the IRS, approximately $25 billion of estate tax was collected by the IRS. (Look here to see a spreadsheet from the IRS with the 2008 estate tax return analysis.)
The State of Florida does not impose an estate tax or an inheritance tax.
Your estate will have to pay federal estate taxes if its net value when you die is more than the “exempt” amount set by Congress at that time. For 2016, there is a $5.45 million exemption per person ($10.9 million for a married couple) from estate taxes at death with a 40% rate on amounts in excess of those exemptions; in 2016 the exemption increases to $5.45 million per individual and $10.9 million for a married couple, while the rate remains at 40%. In addition to the Federal estate tax, some states have their own death or inheritance tax, so your estate could be exempt from federal estate taxes and still have to pay a state estate, death or inheritance tax.
Year of Death………”Exempt” Amount
2013 …$5.0 million, per individual, $10.0 million for a married couple
2014 …$5.34 million, per individual, $10.68 million for a married couple
2015 …$5.43 million, per individual, $10.86 million for a married couple
2. How is the net value of my estate determined?
To determine the current net value of your estate, add all of your assets, add any assets over which you exert control, then subtract your debts. Include your home, business interests, bank accounts, investments, personal property (including jewelry), IRAs, retirement plans and death benefits from your life insurance. (Go to Top of Estate Taxes Page)
3. How can I reduce or eliminate my estate taxes?
In the simplest terms, there are four ways to reduce or eliminate federal estate taxes:
1.If you are married, use both federal estate tax exemptions through proper estate planning.
2.Remove assets from your taxable estate before you die.
3.Buy life insurance, properly structured, to replace assets given to charity and/or pay any remaining federal estate taxes.
4.Take advantage of valuation discounts afforded through the use of limited partnerships, limited liability companies, and other legal entities.
If you would like a consultation with an experienced estate tax planning attorney at The Coleman Law Firm to determine how federal estate taxes impact your estate, or how to reduce or eliminate federal estate taxes, please call us at 904-448-1969 or toll free at 1-866-510-9099 or email us at Info@TheColemanLawFirm.net.
4. Use Both Estate Tax Exemptions
If your spouse is a U.S. citizen, you can leave him or her an unlimited amount when you die with no estate tax liability at your death.
5. Remove Assets From Your Taxable Estate
A great way to reduce estate taxes is to reduce the size of your taxable estate before you die. The most obvious way to accomplish this estate planning objective is to spend some and enjoy it!
Also, you probably know to whom you want to leave your assets after you die. If you can afford it, why not give them some assets now and save estate taxes? It can be very satisfying to see the results of your gifts — something you can’t do if you keep everything until you die. Assets that are likely to appreciate before your death are usually best to give, because the asset and the future appreciation will be removed from your estate.
Assets you give away keep your cost basis for income tax purposes (what you paid for them), so the recipients may have to pay capital gains tax when they sell the assets you’ve given them. But the top capital gains rate is only 15% on assets held at least 12 months (which will increase to 20% in 2011, much less than estate taxes (historically 45%-55%) that would be assessed against those assets if you have a taxable estate, and if you keep the assets until you die.
Some of the most commonly-used estate planning strategies to remove assets from taxable estates are explained below. Note that these are all irrevocable, so typically you can’t change your mind later. One of the IRS requirements for removing the value of an asset from your estate for federal estate tax purposes, is that you give up ownership and control over the asset.
6. Tax-Free Gifts
This is easy and it doesn’t cost anything (other than the value of the assets gifted). Under federal estate and gift tax law, you can give up to $15,000 ($30,000 if married) annually to each of as many people as you want. So if you give $15,000 to each of your two children and five grandchildren, you will reduce your estate by $105,000 (7 x $15,000) a year — $210,000 if your spouse joins you. The amount of this “annual exclusion” is tied to inflation and may increase every few years. (The various states may have gift tax laws that may differ.)
If you give more than the annual exclusion amount (currently $15,000 annually), the excess will be considered a taxable gift and will be applied to your life time $5.45 million gift tax exemption that each individual receives under the Internal Revenue Code.
Charitable gifts of an unlimited amount can be made at any time without incurring a gift tax liability. Gifts for tuition and medical expenses for the benefit of your children or grandchildren (or others if you want) are unlimited, without gift tax consequences, if you give directly to the institution rather than making the gift to the ultimate recipient of the gift value.
If you need an experienced estate tax lawyer in Jacksonville, Florida, to discuss how you can use gifts to reduce or eliminate estate and gift taxes, please call us toll free at 1-866-510-9099.
7. Irrevocable Life Insurance Trust (ILIT)
An easy way to remove life insurance from your estate is to establish an irrevocable life insurance trust (“ILIT”) the owner of the policies. As long as you live three years after the transfer of an existing policy, the death benefits will not be included in your estate.
Usually the ILIT is also beneficiary of the policy, giving you the option of keeping the proceeds in the trust for years, with periodic distributions to your spouse, children and grandchildren. Proceeds kept in the trust are protected from irresponsible spending, creditors, and even divorcing spouses.
8. Qualified Personal Residence Trust (QPRT)
A QPRT lets you save estate taxes by removing your home (a substantial asset) from your estate now; yet you can continue to live there. Here’s how it works.
You transfer your home to a trust for a period of time, usually 10 to 15 years. During this time, you continue to live in your home. When the time is up, it transfers to the trust beneficiaries, usually your children. If you wish to stay there longer, you may make arrangements to pay rent. If you die before the trust ends, your home will be included in your estate, just as it would without a QPRT.
There’s more. A QPRT “leverages” your estate tax exemption. Since your children will not receive the house until the trust ends, its value as a gift is reduced. For example, if the current value of your home is $250,000 and you put it in a QPRT for 15 years, its value for tax purposes could be as little as $75,000. That leaves much more of your exemption for other assets.
If you would like a complimentary no-cost, no-obligation consultation with your Jacksonville lawyer for estate tax planning to determine how a Qualified Personal Residence Trust can help you reduce federal estate taxes on your estate, please call us at 904-448-1969 or toll free at 888-492-2468 or email us at Info@TheColemanLawFirm.net.
9. Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT)
These are much like a qualified personal residence trust (“QPRT”). The main difference is that a grantor retained annuity trust (“GRAT”) or grantor retained unitrust (“GRUT”) lets you transfer an income-producing asset (stock, real estate, business) to a trust for a set number of years, removing it from your estate, and still receive the income. (If the income is a set amount, the trust is called a GRAT. If the income fluctuates, it’s called a GRUT.)
When the grantor trust ends, the asset will go to the beneficiaries of the trust. Since they will not receive it until then, the value of the gift is reduced. If you die before the trust ends, some or all of the trust assets may be included in your estate.
10. Limited Liability Company (LLC) and Family Limited Partnership (FLP)
FLPs and LLCs let you reduce estate taxes by transferring assets like a family business, farm, real estate or stocks to your children now, and still keep some control. They can also protect the assets from future lawsuits and creditors.
Here’s how they work. You and your spouse can set up an LLC or FLP and transfer assets to it. In exchange, you receive ownership interests. Though you have a fiduciary obligation to other owners, you control the LLC (as manager) or FLP (as general partner). You can give ownership interests to your children, which removes value from your taxable estate. These interests cannot be sold or transferred without your approval, and because there is no market for these interests, their value is often discounted. This lets you transfer the underlying assets to your children at a reduced value and less transfer tax (estate tax or gift tax) cost, without losing control.
If you need the assistance of an experienced estate planning and small business attorney to help you with structuring your business and real estate activities to provide asset protection and obtain protection from estate taxes, please call us toll free at 1-866-510-9099.
For more information on asset protection planning and estate planning, read The Florida Asset Protection and Estate Planning Blog.
11. Charitable Remainder Trust (CRT)
A charitable remainder trust (“CRT”) lets you convert a highly appreciated asset (like stocks or investment real estate) into a lifetime income without paying capital gains tax when the asset is sold. It also reduces your income and estate taxes, and lets you benefit a charity that has special meaning to you.
With a CRT, you transfer the asset to an irrevocable trust. This removes it from your estate. You also get an immediate charitable income tax deduction.
The charitable remainder trust then sells the asset at market value, paying no capital gains tax, and reinvests in income-producing assets. For the rest of your life, the charitable remainder trust pays you an income. Since the principal has not been reduced by capital gains tax, you can receive more income over your lifetime than if you had sold the asset yourself. After you die, the trust assets go to the charity you have chosen.
12. Charitable Lead Trust (CLT)
A charitable lead trust (“CLT”) is just about the opposite of a CRT. You transfer an asset to the charitable lead trust, which reduces the size of your taxable estate and saves estate taxes. But instead of paying the income from the CLT to you, the trust pays the income to a charity for a set number of years or until your death. After the charitable lead trust ends, the trust assets will go to your spouse, children or other beneficiaries that you have named when you established the charitable lead trust.
If you would like to consult with a Jacksonville estate planning attorney with The Coleman Law Firm about charitable trusts, please call us at 904-448-1969, or toll free at 888-492-2468, or email us at Info@TheColemanLawFirm.net.
13. Buy Life Insurance
Depending on your age and health, buying life insurance can be an inexpensive way to replace an asset given to charity and/or to pay any remaining estate taxes. The three-year rule mentioned earlier does not apply to new policies. But you should not be the owner of the life insurance policy — that would increase your taxable estate and estate taxes. To keep the death benefits out of your estate, set up an irrevocable life insurance trust (“ILIT”) and have the trustee purchase the life insurance policy for you.
14. How to Reduce Estate Taxes - Summary
1. If Married, Use Both Exemptions
Living Trust with Tax Planning
- Uses both spouses’ estate tax exemptions, doubling the amount protected from
estate taxes and saving a substantial amount for your loved ones.
2. Remove Assets From Estate
Make Annual Tax-Free Gifts
- Simple, no-cost way to save estate taxes by reducing size of estate
- $15,000 ($30,000 if married) each year per recipient (amount tied to inflation)
- Unlimited gifts to charity and for medical/educational expenses paid to provider
Utilize valuation discounts like those provided by limited liability companies and limited partnerships to obtain valuation discounts for lack of marketability, lack of control, and and minority discounts. When used in conjunction with annual gifting through the annual exclusion the value of the annual exclusion is leveraged into higher benefits.
Transfer Life Insurance Policies to Irrevocable Life Insurance Trust
- Removes death benefits of existing life insurance policies from estate
- Included in estate if you die within three years of transfer
Qualified Personal Residence Trust
- Removes home from estate at discounted value
- You can continue to live there
Grantor Retained Annuity Trust / Grantor Retained Unitrust
- Removes income-producing assets from estate at discounted value
- You can continue to receive income
Limited Liability Company / Family Limited Partnership
- Lets you start transferring assets to children now to reduce your taxable estate
- Often discounts value of business, farm, real estate or stock
- Can protect the assets from future lawsuits, creditors, spouses
- You keep control
Charitable Remainder Trust
- Converts appreciated asset into lifetime income with no capital gains tax
- Saves estate taxes (asset out of estate) and income taxes (charitable deduction)
- Charity receives trust assets after you die
Charitable Lead Trust
- Removes asset from your estate, saving estate taxes
- Income goes to charity for set time period, then trust assets go to loved ones
3. Buy Life Insurance
Through Irrevocable Life Insurance Trust
- Can be inexpensive way to pay estate taxes and/or replace charitable gifts
- Death benefits not included in your estate