Most Florida residents want to earn and save as much money as possible. However, having a large bank account means that you'll face unique tax challenges when planning your estate.
If you're not careful, and your estate exceeds the federal estate tax exemption of $5.49 million, your heirs could be hit with a large estate tax burden for every dollar that exceeds this exemption. However, one interesting estate planning tax hack could be useful for your situation. It involves the fact that gift taxes are less expensive than estate taxes.
Why it may be cheaper to give your assets away before you die
Gift taxes are much lower than estate taxes in many situations. Imagine you've used up all of your unified tax credit due to large gifts in the past. Now, imagine that your estate exceeds the federal exemption of $5.49 million by an excess of $100 million. Passing this wealth directly to your heirs through your estate will trigger a 40 percent tax, meaning that your heirs will receive $60 million, and Uncle Sam will receive $40 million.
However, if you gift the $100 million before you die, the gift recipients will only pay 29 million in taxes, meaning they will receive $71 million. That's an $11 million tax savings.
There are some risks involved in this strategy
The above "tax hack" is great, but you might respond with the question, "What if the gifter dies within three years of making these gifts? According to federal estate laws, won't the recipients be taxed upon the closure of the estate as if the gifts were bequeathed in the will?"
The answer to this question is, yes. The gift recipients and the gifter will be assuming the risk that the tax-saving strategy won't work if the gifter dies within three years. This estate tax planning strategy may not work for someone whose health is poor, and who doesn't believe he or she will live another three years.
Can you benefit from an estate tax planning hack?
There are a many estate tax planning strategies that planners can use to minimize taxes for their heirs. The more you know about federal and state tax planning laws, the better you'll be able to apply the correct tax planning strategies to your situation.