I. Introduction: The Death Tax
The Estate Tax is a tax on your right to transfer property at your death. It is often referred to as the "Death Tax" by critics and the "Inheritance Tax" by proponents. For the generational wealth builder, it is the single greatest threat to the "Fortress."
Without a strategy, the government can seize up to 40% (in the US) of everything you spent your life building before your children receive a dime. To protect the legacy, one must understand the interplay between the Annual Exclusion, the Lifetime Exemption, and the Gross Estate.
II. The Lifetime Gift Tax Exemption
In many jurisdictions, the government tracks how much you give away during your life and how much you leave behind at death as one single "bucket."
1. The Threshold (The Exemption Amount)
As of 2024-2025, the US federal exemption is historically high (approx. $13.6 million per individual or $27.2 million per married couple).
The "Sunset" Warning: This amount is scheduled to "sunset" on December 31, 2025, likely dropping back to approx. $7 million. This creates a "Use it or Lose it" scenario for wealthy families.
2. How it Works
If you give a child $1 million today, you don't pay tax on it immediately. Instead, you "use up" $1 million of your $13.6 million lifetime limit. You only pay the 40% tax once your total lifetime giving exceeds the limit.
III. The Annual Gift Tax Exclusion: The "Free" Pass
Before you touch your Lifetime Exemption, you have a "free" annual pass.
The Amount: Currently $18,000 per recipient, per year.
The Power of Compounding: A married couple with three children can move $108,000 per year ($36k per child) out of their estate tax-free, with zero paperwork. Over 20 years, this moves over $2.1 million into the next generation's hands without ever touching the Lifetime Exemption.
IV. Calculating the "Gross Estate"
Most people underestimate the size of their estate because they only think of cash. The IRS includes:
Real Estate: At fair market value, not what you paid.
Business Interests: Your Holding Company and subsidiaries.
Life Insurance: If you own the policy, the payout is included in your taxable estate (this is a common trap).
Retirement Accounts: IRAs, 401ks, etc.
V. Strategic Defenses: The "Estate Freeze"
The goal of the Fortress is to "Freeze" the value of the parents' estate at the exemption limit and push all future growth to the children.
1. Valuation Discounts
If you own a Family Holding Company (LLC), your interest can be "discounted" for tax purposes because it lacks marketability (you can't sell 10% of a family LLC on an app). A $10M portfolio might be valued at $7M for gift tax purposes, allowing you to move more wealth while using less exemption.
2. The ILIT (Irrevocable Life Insurance Trust)
To keep life insurance payouts from being taxed at 40%, the Trust must own the policy, not the individual. This provides the family with "liquidity" to pay the taxes on other illiquid assets (like land or businesses) without having to sell them in a fire sale.
VI. Portability: The "Spousal Second Chance"
If the first spouse dies and doesn't use their full exemption, the surviving spouse can "claim" the unused portion. This is called Portability.
Crucial Rule: You must file an estate tax return (Form 706) even if no tax is owed to "elect" portability, or the exemption is lost forever.
VII. Checklist: Estate Protection
Audit the "Gross Estate": What is the total value of everything you control?
The 2026 Strategy: If you are over the $7M threshold, speak to a lawyer about making "Large Gifts" now before the exemption drops.
Review Insurance Ownership: Ensure your life insurance is held in an ILIT.
Update "Basis" Records: Remember that while estate taxes are high, the "Step-up in Basis" (covered in our Tax entry) is the silver lining.
Conclusion
Estate taxes are a voluntary tax—voluntary for those who have the discipline to structure their affairs in advance. In your Financial Encyclopedia, this entry serves as the "Clock." It reminds the builder that time is not just a factor for compounding growth, but a factor for moving assets out of the government’s reach before the final bell rings.
Internal Encyclopedia Links:
See: Trusts: Using Irrevocable Structures to Beat the 40% Tax
See: The Step-Up in Basis: The Hidden Benefit of Death
See: Intrafamily Loans: Moving Wealth without Using Exemption
Related to: The Ultimate Guide Part 3: The Fortress
