Understanding Federal Gift and Estate Tax

Many of us have good intentions, including a list of things we want to get done, prior to passing. We plan on reaching out to family members, getting our accounting records together, living long enough for Medicare to replace our expensive health insurance, organizing our financial affairs and creating an estate plan. In our best laid plans, we see ourselves living long enough to enjoy spending time with our children and grandchildren. Sadly, the reality is that we all have seen too many times when our friends and loved ones didn't get to realize their plans.

When we pass away, we leave behind possessions or unfinished business: money, property, belongings and even debt. What is left behind is called an estate. Estate and estate taxes are not popular topics of conversation, and for most, there is never a convenient time to put your affairs in order. But, it's important to work on those things now to help you understand how taxes may affect your assets and impact your family after your death.

Estate taxes could be one of the largest expenses your estate may pay. It also means that a significant part of your estate may be going to Uncle Sam and not to your loved ones. If your estate planning goals include reducing taxes and preserving your estate for your heirs or beneficiaries, you need to understand how the estate tax system works, how to estimate your potential tax liability and what techniques are available to manage it.

Foundations of the Federal Gift and Estate Tax System
The gift tax system and the estate tax system are combined. Under the Unified Tax Rate Schedule, lifetime gifts and at-death property transfers are taxed using the same tax rates. Generally, taxable gifts are reported — and any gift tax owed is paid — annually. Upon death, all gifts are added to your gross taxable estate for estate tax calculation purposes, even though a gift tax return may already be filed and the gift tax already paid. Then, the gift tax already paid is deducted from any estate tax owed. There is also a basic exclusion amount that can be applied to lifetime gifts and at-death property transfers.

Utilizing the Estate Tax Freeze
Understanding how the unified tax system works and using the system to your benefit can help save your property for your beneficiaries and reduce your potential estate tax liability. One method you can use to accomplish those goals: the estate freeze. As the name implies, an estate freeze fixes the value of your estate at its present value. The strategy involves the transfer an asset (through a variety of methods) to your beneficiaries with the main goal of removing any future appreciation of that asset from your gross estate and thus potentially reducing any estate taxes that may be due. This could help manage estate taxes because no future growth of your assets will be included in your estate at death. The future appreciation will be attributed to your beneficiaries. Consult your tax professional before structuring any estate freeze strategy so you don't run afoul of any tax rules. Depending on the strategy used, the transfer may trigger capital gains tax or generation-skipping transfer tax (GSTT) and/or gift tax liability and rules can change.

Why It’s Important to Estimate Estate Taxes
It's vital you understand tax liability in order to achieve your estate planning goals. Arriving at a good estimate on your estate taxes can help you save your property for your heirs or beneficiaries, start your thinking on how to accommodate payment of the estate tax bill and related expenses and find ways to reduce the tax liability. Although estimating estate taxes can be complex, don't be overwhelmed. The peace of mind that comes with implementing a successful master estate plan should be worth your time and trouble.

Finding tax-efficient strategies to preserve your estate can be a challenge. RBFCU Investments Group can help you understand your options and find an efficient strategy for your situation. It’s also a good idea to consult with a professional tax advisor. To schedule a no-cost, no-obligation initial consultation with an RBFCU Financial Advisor, please call 1-888-294-0202 today.

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