Arkansas does not have a state estate tax, but individuals with a high net worth can face a significant federal estate tax burden. At Quraishi Law Firm & Wealth Management, our estate tax planning attorneys create a comprehensive estate planning strategy for each client that includes the necessary steps to address the tax burden their heirs will someday face.
Determining If Your Assets Are Subject to Federal Estate Tax
Your gross estate is calculated based on the fair market value of your assets, which is not necessarily what you paid for them or what their values were when you acquired them. This includes cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets.
Once you determine your gross estate, certain deductions and possible reductions to value are calculated to determine what is referred to as your taxable estate. Deductions often include estate administration expenses, property passing to your spouse or a qualified charity, or mortgages and other debts. For those who qualify, the value of some operating business interests or farms may also be reduced.
The estate and gift tax exemption in 2021 is $11.7 million per individual, up from $11.58 million in 2020. For married couples, the 2021 exemption doubles to $23.4 million, up from $23.16 million in 2020. If an estate’s combined gross assets and prior taxable gifts exceed these threshold amounts, an estate tax return must be filed. Any unused portion of the estate tax exemption can be transferred to the surviving spouse.
Exemptions Are Subject to Change
As you might expect, the federal estate tax impacts only a small percentage of the estates that are settled each year. In 2019, for example, only 4,100 returns were filed, and just 1,900 had a tax liability after deductions were applied.
Although only a small number of people currently pay estate each year, it would be a mistake to assume your family is automatically protected. The current estate tax exemptions, which increase each year for inflation and were set by the 2017 Tax Cuts and Jobs Act (TCJA) passed by the Trump administration, are set to expire effective January 1, 2026. The Biden administration has proposed tax changes that would lead to a 50% reduction of the exclusion amount for estate and gift taxes—taking them back in line with the $5.49 million exemption for individuals before the TCJA went into effect. This would result in substantially more people being subject to the estate tax.
The specifics of the estate tax law can be changed at any given time, but the US has been taxing estates and inheritances in some shape or form since the Civil War. Smart estate planning requires continual awareness of tax law changes, so strategies can be implemented to reduce the value of your taxable estate as needed. Failing to update your plan could easily leave your heirs owing millions in additional taxes.
Careful Planning Helps You Leave a Lasting Legacy
When you’ve worked hard your whole life, you deserve the peace of mind that comes with knowing your loved ones will be able to maintain their desired standard of living after you’re gone. With careful planning, you can ensure they won’t pay a penny more in taxes than what is legally and ethically required.
At Quraishi Law Firm & Wealth Management, we work with high-net-worth clients to reduce their estate tax burden using a number of different strategies. These might include plans such as:
- Making annual gifts to your children, grandchildren, or other heirs
- Placing your assets in a trust
- Creating a family limited partnership or a qualified family-owned business interest
- Using part of your exemption early for highly appreciating assets
- Buying additional life insurance to help cover the cost of estate taxes that can’t be reduced via other means
Our estate planning attorneys are available at our Jonesboro and Little Rock office locations to serve clients throughout Northeast and Central Arkansas. We are also available to meet with clients in our Memphis, Tennessee office, so don't hesitate to contact us to set an appointment.