In a little over a year, high net worth individuals will no longer be able to enjoy the federal estate tax exemption limit. As of 2024, the federal estate tax exemption limit stands at $13.61 million, allowing a couple to benefit from a combined exemption of $27.22 million.
With the deadline approaching, you must finalize your estate planning strategy by the end of 2025. After this date, any amount in your estate exceeding the tax-exempt limit of $10 million will be taxed at a rate of 40%.
By the end of 2025, the federal estate tax exemption amount will revert to around $7 million, subject to adjustments for inflation. It remains unclear what changes may occur to this exemption limit post the 2024 elections, but a decrease could be possible before then. Lowering your estate now can save you substantial tax amounts and provide more for your beneficiaries.
Apart from federal estate tax, your state may also impose its own estate tax. Currently, 12 states have estate taxes, including the District of Columbia, with an additional six states levying inheritance taxes.
Avoid hastily sending out gifts and arranging estate planning strategies at the last minute to safeguard your assets. It is essential to be aware that there are numerous scams aiming to swindle your money. Many schemes sound appealing but may only work under specific conditions.
Scammers often target the elderly as they are more vulnerable to fall for deceit. They create anxiety and make you believe their scheme is one of the few (if not the only) solutions to protect your assets from government taxation.
Tim Curtain, a former chairman of the Atlanta Bar Association’s Estate Planning and Probate Certification Section, highlights that scammers typically use various outreach methods such as door-to-door sales, mail, demonstrations, and telemarketing. The companies they claim to represent may sound legitimate, but they might not even be licensed attorneys.
Some individuals, including lawyers lacking estate planning experience, may propose seemingly good plans. Due to their lack of expertise, they might suggest plans that sound appealing but are not aware these plans are developed and provided by other companies, potentially affecting the effectiveness of your estate planning. Accurate wording in documents is crucial for your assets to be distributed as intended.
Recently, some estate planning firms have introduced Spousal Lifetime Access Trusts (SLATs). While these trusts are legal, certain details may lead to complications. Caution is advised when opting for this scheme.
SLATs are irrevocable trusts, meaning you relinquish control over your assets, allowing your spouse to access them. There may also be other beneficiaries (such as children) who may not be allowed access to any property until the non-donor spouse passes away.
If you opt for a SLAT, you can gift trust funds of up to the $13.61 million limit to others, effectively reducing your estate and preventing your beneficiaries from paying federal estate tax.
Your spouse can access trust funds to support their needs. A potential issue with this trust is that if you divorce or your spouse passes away, you may lose access to these funds. If you plan to use part of the funds for living expenses, medical bills, or long-term care, this could pose a problem.
Since irrevocable trust documents cannot be changed, divorcing may create another unwelcome issue. After divorce, your former spouse can still access the trust funds, leaving you with nothing.
Northwestern Mutual explains that SLAT trusts do not incur taxes. Instead, the trust creator must pay taxes on the income generated by the trust, akin to a grantor trust.
If opting for a SLAT, there are ways to address potential issues. Schwab suggests that both spouses can create their own SLATs, making the other the beneficiary. These trusts must demonstrate substantial differences as per IRS requirements. You can fulfill this by creating them at different times, funding them with other assets and amounts, bestowing them with unique powers, beneficiaries, trustees, and termination terms.
Now is the time to start preparing to take advantage of the current federal estate tax exemption. In the current political climate, Congress may reduce the exemption earlier than expected.
If you seek alternative methods to reduce your estate (hence avoiding estate taxes), consider gifting up to $18,000 per person annually. Your spouse can also gift the same amount to the same person. These gifts do not count towards your gift limit. Other methods include donating to charitable organizations, contributing to education or someone’s medical expenses, and retirement accounts.
The current federal estate tax exemption limit provides an excellent opportunity to lessen your estate tax burden. Hiring an experienced estate planning attorney can ensure your estate planning and trust establishment are handled appropriately. Before reaching any agreements, understand the pros and cons of any trust.
The original article titled “Watch Out for Estate Planning Schemes” was published on the English Epoch Times website.
Epoch Times ©2024. The views expressed in this article are solely those of the author and are intended for general informational purposes only, not for recommendation or solicitation. Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or other personal financial advice. Epoch Times does not guarantee the accuracy or timeliness of the article’s content.