The pandemic and the hyperinflation that followed it have had the effect of raising the valuation of people’s estates. Though the Commonwealth of Pennsylvania has no estate tax and the federal estate tax is currently pegged at $12.92 million in assets before any tax sets in, the reality is that many individuals and couples can face tax considerations when doing their estate planning. Their estate and their children can be on the hook for up to 40 percent of the asset valuation.
This is even more crucial when considering that the current exemption will expire in 2025 unless Congress renews it or sets a new limit. That year, the Tax Cuts and Jobs Act (TCJA) will expire, and along with it, the current high threshold levels of estate taxation. That will mean the exemption can revert to its previous level of about $5.49 million.
Assets include any real property, investments in securities, cash on hand, vehicles and boats owned, art or other collections, business interests, and more. Your children who stand to inherit your estate may be forced to liquidate many of these assets just to satisfy Uncle Sam. Thoughtful and careful estate planning can reduce or even eliminate the need for your heirs to do a “yard sale” to meet estate tax consequences.
Though there is no estate tax in Pennsylvania, there is an inheritance tax, however, which goes by a sliding scale depending on the recipient, their relationship to the decedent, and their age. This is also a factor to consider since it is not necessarily estate-valuation pegged. Agricultural assets and property owned by veterans are generally excluded when bequeathed to heirs.
If you fall into the category of having high-value assets and face the possibility of federal estate tax consequences in or around Bethlehem or Palmerton, Pennsylvania, contact us at Law Office of Shabbick & Stehle.
We are estate planning attorneys with a combined more than five decades of experience. We will assess your situation and provide you with options to cope with any tax liabilities your children may face when you’re gone. We proudly serve clients throughout Lehigh, Northampton, and Carbon counties.
Strategies to Limit or Avoid the Federal Estate Tax
As it stands now, the federal estate tax is pegged at a valuation of $12.92 million in assets before it kicks in, and it is also pegged to inflation, meaning it generally rises every year. However, the current threshold calculation is set to expire in 2025, and who knows who will control Congress in 2024 and how they will deal with the expiration. As noted above, the threshold could easily revert to something close to $5.49 million.
As it stands now, however, a married couple can double the exemption through the establishment of an A/B trust. Under an A/B trust, when one spouse passes on, the exemption passes to the surviving spouse, so that the federal estate tax won’t kick in when that spouse passes away unless assets total more than $25.84 million. That will provide an added cushion for the surviving children who inherit the estate.
That is one strategy, but it still may not cushion everything from the long reach of Uncle Sam, especially if the threshold reverts in 2025. Other strategies include:
GIFTING: You are allowed to make cash gifts of $17,000 (in 2023) a year to any and all tax-free. This can be one way of reducing the asset value of your estate, though it may not make much of a dent if your estate is valued highly. Still, it is a valid, perfectly legal strategy. If you have three children, for instance, you can gift a total of $51,000 a year. That can add up over the years depending on your life expectancy. The amount rises according to inflation.
DONATING TO CHARITY: You can also give away assets to charitable causes, whether in cash or other assets such as art collections or anything else of value. This you can do while alive or through the instructions in a will or trust. There is no limit on the charitable contributions you can make.
BUYING LIFE INSURANCE: You can also cover any estate taxes due by taking out a life insurance policy. This will relieve your inheritors of having to sell off assets to meet the tax obligation. To keep the value of the life insurance policy out of the calculation of the estate’s value, you can set up an irrevocable life insurance trust.
ESTABLISHING AN IRREVOCABLE TRUST: You can also put all your assets into an irrevocable trust managed by a trustee you name. The trust will then own and control all your assets, and the trustee can distribute assets to your beneficiaries when you’re gone. The beneficiaries can also choose to name a new trustee, including one of their own. There will be no estate taxes on assets held in an irrevocable trust.
SETTING UP A FAMILY-LIMITED PARTNERSHIP: Similar to a trust, a family-limited partnership will control whatever assets you assign to it and will become a separate entity from you and your heirs. This doesn’t necessarily avoid all estate taxes, but reduces your children’s liability.
Start Now to Limit or Avoid Estate Tax Liabilities
The point is to anticipate all possibilities when it comes to estate tax liability. There are strategies at your disposal that can limit or even potentially eliminate any tax liabilities for your family when you’re gone. If you’re in the Lehigh Valley area of Pennsylvania, reach out to us at Law Office of Shabbick & Stehle with all your estate planning questions and concerns.