3 Common Estate Tax Planning Myths

Over the past few months, I’ve presented information to attendees at the Farm Journal Legacy Project Conference as well as Legacy Project workshops. In doing so, I continue to hear several estate planning myths, the most common of which are highlighted here. 

glasses on keyboardMyth No. 1: I can only give $14,000 total per year. The gift tax laws allow producers to give $14,000 per year per donee without filing a gift tax return or reducing the lifetime exemption amount ($5.43 million in 2015). Many incorrectly deduce that the giver can only contribute a total of $14,000 to all donees for the year.

In fact, the provision allows a person to give $14,000 to as many people as he or she wants each year. For example, if a father has three children, each of whom has a spouse and two children, there are 12 possible gift recipients. The father may give away $168,000 for that year, and his wife may give away another $168,000 for a total of $336,000. If assets such as farmland are held in a limited liability entity (LLE), the actual value that can be given away is even greater. Most gifts of LLE units are entitled to a discount of between 20% and 40%. Using this example, let’s assume a 30% discount on a gift of LLE units. After applying the discount, we can make an annual gift of $480,000 ($336,000 divided by 0.70) without reducing the lifetime exemption amount. File a gift tax return to start the three-year statute of limitations with the IRS.

Myth No. 2: A living trust will save me estate taxes. A living trust is a great tool to allow for the transfer of assets at death without going through the probate process. This is especially important if you own real estate in multiple states. 

Another nice feature of the living trust is the privacy it provides to heirs. A will and asset values become public when filed with a court. By contrast, a living trust ensures no assets are listed publicly upon death.

Having said that, estate tax savings are the same for both a living trust and a properly drafted will. You should set up a living trust if you want greater privacy or ease of asset transfer, but do not expect any additional estate tax savings.

Myth #3: I am worth less than $5 million, so I don’t need to worry about estate taxes. Many assume they do not need to worry about estate taxes because the lifetime exemption amount is indexed to inflation. They reason this adjustment will cover any estate increases. 

That line of thinking is incorrect, though. For example, assume the lifetime exemption amount is increased each year by a 2% inflation factor. Your estate tax value is $3 million, which is much lower than the $5.43 million estate exemption for 2015.

Now, let’s assume your estate’s value increases by 5%, 7% and 9% over the next 25 years. At the 5% level, your taxable estate will exceed the lifetime exemption in 21 years; in Year 25, you will have a taxable estate of about $1.2 million.

At the 7% level, a taxable estate happens in Year 13, and your taxable estate after 25 years is a little more than $7 million. 

If your estate increases at 9%—still less than the increase in most farmland values over the past decade—a taxable estate happens in Year 9. Your taxable estate at Year 25 is now about $16 million, resulting in more than $6 million of estate taxes.

If any of these myths applies to your situation, meet with an estate planning adviser to get your estate in order. According to the old saying, “An ounce of prevention is worth a pound of cure.” The time to get started is now.  

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