Reducing the Taxable Estate in Nevada
When an individual’s “estate” (i.e., the total value of all assets owned by that individual at the time of death) reaches a certain value, the individual will have to pay estate tax at the time of death. This means that the individual’s heirs will forfeit a portion of their inheritance to the estate tax. The impact of the estate tax can be reduced or avoided if the individual reduces the value of his or her estate during the individual’s lifetime (i.e., before death). This is known as reducing the taxable estate. This article discusses a few standard techniques individuals might use to reduce their taxable estate.
Estate Reduction Techniques
Lifetime Spending
The first estate reduction technique is probably the most obvious one, but it is still worth mentioning: use up and spend your assets for your benefit before you die. You earned it; you spent it. You do not have to leave what you have earned and accumulated during your lifetime to anyone if you do not want to. You may want to tell your children or other beneficiaries, “If I leave you anything, it is only because I miscalculated.” Most clients do not want to be aggressive in reducing their estates, and most do want to leave something for their children and other beneficiaries. But you may also want to be a bit more generous with yourself and — using one client’s example — “buy a bit of melon in the off-season.”
Gift Giving
Most estate reduction tools involve some sort of gift giving. In the United States, and therefore in Nevada, each individual can give up to $18,000 to each of any number of recipients in each calendar year without having to report a taxable gift or use up the individual’s lifetime applicable exclusion amount (also sometimes commonly referred to as the person’s “estate tax exemption,” which is the amount a person can transfer during life or after death without having to pay gift or estate tax). The lifetime applicable exclusion amount is $13,610,000 in 2024. Taxable gifts require no out-of-pocket payment of gift tax until the cumulative total of lifetime taxable gifts exceeds the applicable exclusion amount. But even if a gift tax were paid (for example, if the gift exceeded the individual’s lifetime applicable exclusion amount), from a transfer-tax perspective, making lifetime gifts is much more effective than making after-death distributions under a will or trust. Consider the following illustration:
- A lifetime gift of $1 million in the 40% tax bracket would generate a gift tax of $400,000, so the gift and the tax would total $1,400,000, of which the recipients end up with $1,000,000 or 71.4%, making the net transfer tax rate 28.6%.
- A death-time transfer of $1,400,000 at the 40% rate results in an estate tax of $560,000, leaving $840,000 for the recipients. The true tax rate is 40%.
- In both examples, the transfer and the tax combination totals $1,400,000, but the lifetime gift results in the beneficiaries receiving $160,000 more (and the IRS receiving $160,000 less).
Making More Effective Gifts
Some gifts can be more effective than others at reducing the taxable estate.
It is common for people to make annual gifts of $18,000 (the gift tax annual exclusion amount in 2024) in cash to children, grandchildren, and other beneficiaries. This reduces the estate by the amount of cash and by the amount of its potential earnings.
Giving away appreciated property is a more effective gift-giving technique. This type of gift reduces the estate by the current value of the asset given and by the value of potential appreciation and earnings.
The best type of gift is a gift that reflects a small value for gift tax purposes but reduces the estate by a larger value. For example, if you can give a $18,000 gift and reduce your estate by $20,000, $25,000, or more, you have effectively “leveraged” your gift tax annual exclusion. This can be accomplished through value-discounting techniques (which are beyond the scope of this article) or by gifting assets that are likely to be appreciated in the future.
While it is expected to make an outright gift to a beneficiary, it is possible, and often more appropriate, to make gifts to beneficiaries through irrevocable trusts.
Contact an Estate Planning Lawyer in Nevada
Our experienced estate planning attorneys can help with your estate planning and your gift and estate tax planning needs. Call us at 702-333-1711 to schedule a free consultation.
Attorney Kennedy Lee practices in all aspects of trust and estate law. He views all legal issues from multiple angles (e.g. from litigation to administration point of view) to provide a higher quality of service to our client.
