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With the highest federal estate tax currently 40%, estate tax planning is an important aspect of sound financial planning; one you will want to make certain you accomplish effectively.   The estate tax currently kicks in for estates valued at $5.45 million and above ($10.9 million for married couples).  While the majority of Americans are below this threshold, that does not mean that you won’t benefit from carrying out a little bit of estate planning. 

Estates of $2 Million or Less in Size ($4 Million if married)

• Tip #1 Update Your Will
  Many Americans do not have a will or, if they do, it has not been updated in years.  If you die without a will, you are considered to have died “intestate”.  Your assets will then be distributed in accordance with state law and the results are often not what you would have wished, if you had taken the time to plan.  Similarly, a will that is not up-to-date may not reflect your current wishes, either.  For example if you were divorced and remarried and didn’t update your will after you remarried, it probably still provides for your ex-spouse.  The unintended consequences would be to leave your current spouse high and dry, with a significant portion of your assets going to your ex.
  
  
• Tip #2 Be Mindful of the State Estate Tax
  Many states do not conform to the federal estate tax exemption amount of $5.45 million*.  Be mindful that, although you may not be subject to the federal estate tax, the tax authorities get one last shot at you at the state level.  Work with your tax advisor to understand the tax implication for the state in which you reside, so you can preserve your wealth for your heirs. *Ohio does not have an estate tax currently. 
  
  
• Tip #3 It’s Worth More! Understand the Stepped-up Basis for Testamentary Gifts
  Barring any huge wealth acquisition events (lottery/casino winnings, large inheritances, and life insurance proceeds), most individuals with estates of less than $2 million will never be subject to estate tax.  This makes it more advantageous to keep your assets in your estate because, when they are distributed to the beneficiaries, they get a “stepped up basis” to fair market value.  This represents the increase in the value of an appreciated asset to its fair market value for tax purposes, upon the death of the owner.  When an asset is passed on to a beneficiary, its value is often more than it was when the original owner acquired it.
  
  The stepped-up basis will help beneficiaries tremendously as it will reduce the amount of capital gain tax they will need to pay when they eventually sell the property.  If you were to gift them the same property during your lifetime, your beneficiaries would take on the same basis in the asset as you, which could trigger a potentially higher tax upon sale.

Estates between $2 Million and $5.45 Million (10.9 Million if Married)

For those with estates in this size range, planning is a little more difficult as a dual threat exists.   One concern is that you want to preserve enough assets for yourself while you are living, so you can maintain the lifestyle that you worked so hard for and are accustomed to living.  However, you also want to plan on not holding onto too high a value of assets exposing your estate to unnecessary estate tax.  It could take just a handful of your assets appreciating significantly in value to push you over the exemption threshold.  There are a few strategies you can use to help you properly manage the level of assets that will be included in your estate. I am going to switch up the advice a little bit for estates of this size. 

• Tip # 1 Give Gifts While Living
  You may want to consider making gifts while you are still living (lifetime gifts).  Any gifts given can help dramatically lower the amount of assets included in your estate.  In doing gift planning, try to gift assets that you think will significantly appreciate in value during your lifetime.  This can shield your estate from reporting all of that gain.
  
  

• Tip #2 General Annual Exclusion 
  
  You can currently give up to $14,000 free of tax to any individual in a tax year.  The person does not have to be related to you.  It can be for any purpose and there is no limit to the number of people you can give a gift to.  If you are gift-splitting with a spouse, you can jointly claim up to $28,000 per year per recipient.  It is important to note that an annual exclusion gift must be a gift of a present-interest.
  
  

• Tip # 3 Unlimited Gift Freebie

Another consideration is that the tax code allows you to make certain gifts in an unlimited amount. 

For example, one can make an unlimited amount of qualified medical and education gifts as long as the rules noted below are carefully followed.  

1. Educational gifts must be paid directly to the educational institution and the amount gifted cannot include amounts used for books, supplies, or room and board.
2. Medical gifts must be paid directly to the medical care provider. These rules are very strict in application.

Keep in mind, these amounts are in addition to the annual gift exclusion amount currently set at $14,000 as noted in tip #2.

• Tip #4 Offer Low Interest Loans to Family Members 
  
  Giving low interest loans to family members can be a good strategy to help push some of the value out of your estate.  It can also help the family member go to school, complete a project, etc. at lower cost than if they received a loan from a bank.  The important aspect is to make sure that you charge an adequate rate of interest to be using the appropriate Applicable Federal Rate.  If you do not, then you could potentially open yourself up to unexpected tax issues.  Also, be aware that interest payments will be taxable to you and, in most cases, nondeductible to the family member.
  
  

• Tip #5 Traditional to Roth IRA Conversion
  
   Converting your traditional IRA’s into a Roth IRA may be advisable for those in this estate-value range.   The negative aspect of doing this is that the conversion will be subject to an income tax.  The good news is that your estate will be reduced by the amount of income tax you pay on this conversion.  Furthermore, you are able to leave a sizable income tax-free Roth IRA to your beneficiaries since the tax is being prepaid at conversion combined with the fact that there are no required minimum distributions associated with Roth IRA’s.
  
  Be sure to pay the resulting tax with funds outside of the IRA. We recommend this for two main reaons: 1) If you are under the age of 59 1/2, you will be subject to a 10% early withdrawal penalty, and 2) If you use funds from inside the IRA, it defeats the purpose of the IRA as it hinders your ability to have tax-free growth of your funds. 
  
  Finally, be aware that certain income limitations apply. The single taxpayer adjusted gross income limitation is $117,000 for 2016 and you are completely phased out at $133,000. 
  
  For married filing joint taxpayers, the phase out begins at $184,000 with the complete phase out at $194,000. 
  
  

• Tip #6 Elect Portability for Estate Tax Exemption
  
  Make sure you elect to transfer the “Deceased Spousal Unused Exclusion Amount” to the surviving spouse.  This election allows the surviving spouse to use any of the estate tax exemption that the decedent-- spouse did not use, in addition to his or her estate tax exemption, when determining whether or not he or she is subject to estate tax.   This is a huge benefit that can make a world of difference for your estate when it comes time to pay taxes.
  

As you can see, there are many creative strategies one can take advantage of in creating one’s estate plan. Tax law can be complicated. Our Estate, Gift and Trust team works with clients to help to minimize their tax obligation while enhancing asset-protection. To learn more, contact us…