Legacy Planning: Estate Tax, Gift Tax & Trusts

in Financial Planning by

Some parts of this blog were updated on March 14, 2018

Life is meaningful and complex – and so are the taxes associated with it. If you’re considering what you would like to leave your family or pursuing charitable giving, there are certain tax implications of both to consider.

The Estate Tax

Many taxpayers have some understanding, even if it’s vague, that there are estate and gift-tax exemptions within the IRS code.

Due to recent tax reform, you will trigger estate taxes only after you have accumulated assets worth more than $11.2 million, for 2018. That figure is based on an individual’s assets, so married couples can protect nearly $22.4 million from estate taxes.

There’s an estate tax marital deduction, which exempts (at least until your spouse dies) all your estate, no matter how large, from federal estate taxes if your estate passes directly to your spouse. Effectively, this means few people need to worry about federal estate taxes. Some states, however, have estate tax provisions that kick in much earlier, so it pays to know the specific state laws where you live.

The Gift Tax

The gift tax applies to assets transferred during life. It’s intertwined with the estate tax because a taxpayer’s credit for the estate tax can be applied to the gift tax. You can give away the total amount protected during your life or when you pass away, but you can’t give more than that amount without paying one of the taxes. Each person gets an $11.2 million exclusion over their whole lives. They have the option to chip into it over time if they gift more than $15,000 per recipient in a single year. If you decide to use some of the credit to make big gifts while you’re alive, then you’re required to disclose the transfer by filing a gift tax return.

Taxpayers can take full advantage of another gifting opportunity – the annual exclusion. In addition to the estate and gift tax exemption, every taxpayer can give an unlimited number of people a certain amount tax free every year. Currently, you can give $15,000 per recipient for 2018 – the highest it’s ever been. A married couple generally can give a single person (e.g., their child) up to $30,000 – that’s $15,000 from each parent – annually without triggering the gift tax or filing requirements.

Trusts

There are many different types of trusts and each one is taxed differently, depending on its structure. From revocable/living trusts to irrevocable and testamentary trusts, trust taxation is highly personal to your own unique situation. Establishing a trust requires legal guidance, but you can start taking the right steps by scheduling time with a registered financial advisor.

Our Take

While giving away wealth seems relatively simple on its surface, there are numerous nuances that can make things a bit tricky. To learn more about taxes and your legacy, read our free “Personal Capital Tax Guide for the Savvy Investor.”

Download guide

This blog is for informational purposes only and is intended to offer guidance; not specific legal or tax advice. Clients are advised to consult their personal estate attorney and CPA before taking action based on this advice.

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Amin Dabit, CFP®

Amin Dabit, CFP®

Amin Dabit is the Director of Advisor Services with Personal Capital. Along with the EVP of Advisory, Amin helps lead Personal Capital’s financial planning experience and advice. Amin brings over a dozen years of experience in private wealth management and financial planning. Amin works with the advisory team to identify and establish strategies for reaching clients' financial goals by providing comprehensive, customized financial advice designed to improve their financial lives.

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