Avoiding Estate Taxes
While Virginia doesn’t impose a state mandated estate tax, there is still a federal estate tax. The federal estate tax limit includes estates valued at $5.45 million, or $10.9 million for couples. Federal estate taxes are imposed on any estate that is valued over the estate tax threshold. Estates under the federal threshold are only subject to the estate taxes imposed by the state of property jurisdiction.
However, there are legally sound ways of avoiding estate taxes from state and federal agencies.
Generation-skipping Transfer (GST)
Although this option does carry a GST tax assumed by your beneficiaries, it allows you to avoid a tax of your overall estate.
A GST operates by allowing you to bequeath property to your named beneficiaries. However, your beneficiaries must be one or two generations removed. In other words, you leave your property to you grand- or great-grandchildren, but you cannot leave it to your immediate children. You are able to leave it to a non-family member, so long as the generation gap still applies.
Establishing your GST means transferring property from your estate into a generation-skipping “trust”. The property you transfer is no longer considered a part of your overall estate, and is not considered in your estate’s value. Therefore, transferring property by a GST will lower your overall estate value, possibly exempting you from paying an estate tax.
As stated, your beneficiaries are responsible for paying the GST tax imposed on the value of the inherited estate. However, the rate of taxation is fixed and dependent upon the value of the inheritance rather than your overall estate.
If your bequeathed property does not exceed the GST tax threshold, your beneficiaries are not subject to pay GST tax. As of 2016, the federal limit on a GST value is $5.45 million. A GST that exceeds the threshold is subject to a flat 40% rate of taxation.
One of the simplest methods of avoiding federal estate taxes is to bequeath your property to your surviving spouse.
In Virginia, dying intestate – or without a will – passes your estate to your beneficiaries in order of intestate succession law. In this case, your estate passes to your surviving spouse. Spousal inheritance is exempt from federal and state estate taxes.
Your estate property transfers directly to your spouse without tax or probate. However, if you have children from a prior relationship, they are entitled to a cut of your estate if it is left intestate. Your prior children receive 2/3 of your estate, while your surviving spouse receives the remaining 1/3.
Establishing a will or a trust that guarantees full spousal inheritance prevents your estate from being inherited through intestate succession.
Lifetime Charitable Contributions
Charitable giving allows you to lower your estate value for estate tax exemption, while offering an immediate income tax deduction.
Keep in mind that a charitable gift is not a gift made to friends or family members, it is a financial gift to a non-profit charitable organization. Gifts to family do not qualify for tax exemption.
Donations and lifetime charitable gifts are deducted up to 50% of your adjusted gross income, depending on the value of your contribution. However, certain organizations only permit a 30% deduction, such as private foundations, veteran organizations, fraternal societies, and cemetery organizations.
Your contribution must be paid before the close of the tax year in order to be deductible.
Bequeathing property or other estate assets to your beneficiaries during your lifetime helps to lower your overall estate value. A lower estate value will exempt you from estate taxes.
The federal limit on lifetime gifts is $14,000 annually. You are able to give to as many people as you would like within that tax year, however your gifting amount cannot total more than $14,000 for the year. For spouses, your exemption is raised to $28,000, jointly. Gifting more than the threshold results gift taxes that you are liable to pay.
With lifetime gifts, you are able to transfer property to your beneficiaries during your lifetime. However, once you have gifted the property out of your estate, it is no longer your property. You relinquish all legal rights to the property and assets you choose to gift.
Gifting your property directly to your beneficiaries removes the value of the gifted property from your overall estate. Therefore, that property is not accounted for in your overall estate value, which decreases your likelihood of qualifying for the federal estate tax.
Other gifts that are exempt from both gift and estate taxes include:
- Tuition or medical expenses provided for others
- Gifts made to your spouse
- Gifts made to a political organization of your choosing
In addition, your charitable contributions are exempt from gift and estate taxes.
Establishing an irrevocable trust is a controlled method of transferring your assets from your estate. Once you establish your irrevocable trust, you choose which property is transferred into the trust, as well as the trust beneficiaries.
Your trust acts as a legal entity carrying ownership of your trust property. Once you transfer your property to the ownership of the trust, you are no longer considered the legal owner of that property. Therefore, the property of your trust is exempt from your estate’s total value, which could eliminate you from estate taxes.
Remember, the trust is irrevocable. Once you transfer your property into the trust, you cannot change, alter, or cancel the trust.
Estate taxes are capable of taking a toll on any estate, but especially your beneficiaries, who receive only a portion of what they’re promised. Avoiding estate taxes is easier than you think, as long as you know how to manage your estate’s assets. Schedule a consultation with our estate planning attorney to see how avoiding estate taxes is possible.