Estate planning is essential for anybody to determine what will happen to their assets in the event of their incapacitation or death. However, complex tax issues and special tax planning circumstances will often arise for high-net-worth individuals (HNWI) and others with large sums of accumulated financial liquid assets or other exceptionally valuable assets.
One such consideration for certain high-income Americans is the federal estate tax.
The estate tax is a tax on your right to transfer property at your death. It applies to property that you transfer to beneficiaries by will or according to state laws of intestacy if there is no will, through a trust, or the payment of certain life insurance benefits or financial accounts.
The estate tax applies when the net value of an estate exceeds a threshold for exemption. If your estate is worth more than the exemption amount, the tax bill for your beneficiaries could be steep, with most of your estate subject to a 40% rate. For deaths occurring in the tax year 2022, the exemption amount is set at $12.06 million, an increase from last year’s amount, which was $11.7 million.
If the value of your estate is lower than the exemption amount in the year of death, then your assets are not subject to the federal estate tax. To put it another way, if you become incapacitated or pass away in 2022, and your net estate is worth less than $12.06 million, then you don’t have to worry about the federal estate tax.
Nevertheless, understanding this tax is a crucial component of good estate planning for some individuals.
Here are five steps you can take during your lifetime to help mitigate or minimize estate tax for those who will inherit your financial assets.
Historically, the exemption amount has risen consistently every year since the federal estate tax reform in 1976. Many of the increases were modest adjustments for inflation, but other times the amount increased considerably. For example, in 2011, the exemption went up from $1 million to $5 million, and 2018 saw the amount jump from $5.49 to $11.18 million.
But that nearly fifty-year pattern is soon to change. The 2018 adjustment was only temporary, and under current law, it will reduce by 50% (adjusted for inflation) on January 1st, 2026.
This means that high-income taxpayers have a historic window of opportunity to anticipate the lower exemption amount and reduce future transfer taxes.
To utilize the exemption now and lock in substantial tax savings under the current, higher amount, transfer your assets in the form of charitable gifts made during life. You will not owe gift tax on gifted funds until they exceed the exemption amount, after which point you can still gift up to the annual limit of $15,000 each year.
You also place the gifted assets outside of your taxable estate by transferring assets during your lifetime, where they will accrue appreciation separately. This can lessen the taxation of the assets even further.
Life insurance benefits paid out upon death are not usually subject to the estate tax, although there are two exceptions:
The second situation is more likely, as beneficiaries are usually individuals, but the estate will be taxed on life insurance benefits in either case.
Of course, the life insurance policy owner does not need to be the same person whose life the policy ensures. That means if the decedent did not own the policy, then the proceeds do not count as part of their estate and are therefore not subject to the estate tax.
If you own life insurance on yourself, it may be worth changing ownership of the policy as part of your estate planning. The IRS considers the transfer of the policy in this context to be a gift, and it removes the death benefit from the estate so long as the original owner lives for three years past the transfer.
Additionally, if much of your estate comprises illiquid assets, such as real estate or businesses, the liquid assets may not be enough to cover the tax bill. A good life insurance policy can help cover most of the cost and cushion the burden for your beneficiaries.
To ensure you are getting the most benefit possible from your life insurance policies, make sure they are all paid and have not lapsed. You may also consider selling the policy to an irrevocable life insurance trust (ILIT) or even stopping or reducing payments if the cash value is sufficient.
The unlimited marital deduction allows an individual to transfer an unrestricted amount of assets to a spouse tax-free, either during life or upon death. This does not exclude the assets from taxation forever but does postpone tax on them until the death of the recipient spouse.
Take note: if the spouse is not a U.S. citizen, the marital deduction does not apply. Still, a taxpayer is permitted a higher annual exclusion for gifts to a non-citizen spouse ($164,000 in 2022).
There are some exceptions. Assets passing to a non-citizen spouse upon death do qualify for the marital deduction if:
If a marital deduction is not allowed, and the surviving spouse’s estate is later subject to U.S. estate tax, the surviving spouse’s estate receives a credit for tax paid on the first spouse’s death.
Creating a Family Limited Partnership (FLP) is a common but powerful method for transferring business ownership from one generation to the next. It can also help reduce estate value while protecting against asset loss.
An FLP is essentially a holding company where the Limited Partners are family members or heirs. As a General Partner, this type of entity allows you to maintain control over the management and distribution of the assets while shielding the assets from creditors and reducing gift and estate taxes.
Upon your death, control of the assets transfers to the Limited Partners — your beneficiaries, who receive a break on the estate, gift, and income taxes for the assets they now manage.
If properly executed, gifting portions of your estate to your heirs through an FLP during your life can have notable advantages. For example, it may be possible to pass 115-130% of the value of your exemption to your heirs while entirely avoiding estate taxes.
As icing on the cake, once the transfer is complete, any growth in the value of the assets is free from estate taxes, too.
If the net value of your estate is lower than the current federal exemption amount, that doesn’t necessarily mean you are not exposed to state-level estate taxation. Although many states do not impose state or inheritance taxes, some do, and in some cases, the estate tax liability can be surprisingly high.
While only eleven states have an estate tax alone, seventeen states and the District of Columbia may tax your inheritance, estate, or both. This graphic from the Tax Foundation breaks down which states levy one or both kinds of taxes and the rates and exemption amounts for each state.
If you are a client and would like to book a consultation, call us at +1 (212) 382-3939 or contact us here to set up a time.
If you aren’t a client, why not? We can take care of your accounting, bookkeeping, tax, and CFO needs so that you don’t have to worry about any of them. Interested? Contact us here to set up a no-obligation consultation.
Interested in receiving updates in your mailbox? Check out our newsletter, full of information you can use. It comes out once every two weeks, and you can register for it below.
Found this article helpful? Share it with your network.
Above & Beyond
New York City
2 West 45th Street, Suite 1208
New York, New York 10036
565 Taxter Road, Suite 105,
Elmsford, New York 10523
Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.
Send us a message and we will contact you as soon as possible.