Virginia Estate Tax: Top 10 Ways to Avoid

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Paul Sundin, CPA

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We have a lot of clients who reside in the great state of Virginia. Virginia is known for having rather high state tax machine. How much do you know about the Virginia estate tax?

In this post, we’re going to take a look at Virginia estate tax, gift tax and inheritance tax. We may have a few surprises for you.

Virginia estate tax

Unlike the federal government, Virginia does not have an estate tax. This is great news for Virginia residents. 

But just because Virginia does not have an estate tax does not mean one is not assessed at the federal level. The estate tax rate is 40% so you should do everything in your power to minimize any estate tax exposure.

What is the federal estate tax?

Federal estate taxes have been around for decades. But it has been a big focus recently as a result of tax reform and other political issues.

In theory, the estate tax calculation is simple. But in practice some of the details can be challenging.

The most challenging aspect is evaluating business interests and real estate as of the date of death. An alternate valuation date of six months after the date of death can be utilized.

Once all assets are valued, the estate can deduct any liabilities such as mortgages, credit cards, personal loans, medical bills, and other debt obligations. The final step to determine net assets is to reduce it for legal and accounting costs. Funeral and burial costs can also the deducted. 

Inheritance tax and gift tax

Virginia also does not have and inheritance tax. In fact, only seven states access have an inheritance tax. So Virginia residents could find they have to pay inheritance tax to another state as a result of an estate in another state.

Virginia does not have a gift tax. This is typical for most states that do not have an estate tax. But remember you are still subject to tax at the federal level.

For example, suppose Chris lives in Beijing, China, and transfers the legal title to his San Francisco, California, house to his daughter Susi. The transfer of real property to the recipient is subject to gift tax because the property is located in the U.S. Money, on the other hand, is treated as tangible personal property and is subject to taxation.

In other words, the gift tax applies to all transfers of property, including money. In other words, if you give money to a non-citizen spouse, you can’t use the marital deduction, and your annual exclusion is reduced to 50%.

However, you should make sure that you are aware of the gift tax rules and regulations. The gift tax requires you to report any large gifts you give. F

or example, giving money for college is an example of a large gift. However, this money must be used by the recipient after it has been given to them. If it isn’t, the gift may be considered an unsecured loan and will be subject to gift tax. So, be sure to check the IRS guidelines.

Trust tax issues

A revocable trust is a type of living trust established by a living individual. It transfers ownership of property to a trustee but the grantor retains the power to change, amend, and terminate the trust at any time.

A typical revocable trust arrangement provides income to the grantor during his or her lifetime and then passes the property to one or more beneficiaries when the grantor passes away. This type of living trust also allows the grantor to name one or more beneficiaries, and it can be amended or terminated at any time.

Another form of revocable trust is the charitable remainder trust. A charitable remainder trust allows the grantor to make a charitable gift, while retaining an income stream for a named beneficiary.

Land, machinery, or grain inventories can be held in trust until the grantor dies and then transferred to the trust. If the grantor’s estate pays estate tax, the transferred policy is tax-free income for the beneficiaries.

A revocable trust can also include an A/B provision, which can be used to provide good asset protection for the surviving spouse. Another popular type of revocable trust is an “A/B” trust, which creates a bypass trust upon the death of the first spouse.

It is important to remember that A/B trusts are not required by law for married couples. If your net worth is less than $5 million, a revocable trust is the ideal way to transfer assets.

How to Avoid the Virginia Estate Tax

There are many planning techniques that you can utilize to reduce or even eliminate estate tax. Make sure you and your CPA consider the following:

  • Intentionally Defective Grantor Trust (IDGT)
  • Donor-Advised Funds
  • Dynasty Trusts
  • Charitable Gift Annuity
  • Grantor Retained Unitrusts (GRUTs)
  • 529 Plans
  • Revocable Trusts
  • Irrevocable Life Insurance Trust (ILIT)
  • Direct Medical and Tuition Payments 
  • Gifts Below Annual Exemption
  • Qualified Terminable Interest Property (QTIP)
  • Qualified Personal Residence Trusts (QPRTs) 
  • Grantor Retained Annuity Trusts (GRATs) 
  • Crummey Trusts 
  • Family Limited Partnerships (FLPs)
  • Charitable Remainder Trusts (CRUT)
  • Grantor Retained Income Trusts (GRIT)
  • Irrevocable Trust Structures
  • Minor Trusts 
  • Special Valuation of Farms and Businesses

Who should consider estate planning strategies?

While everybody should address estate planning, there are many people that should be especially concerned. In fact, most folks don’t even realize that retirement accounts (IRAs, 401ks, etc) and life insurance proceeds are included in a person’s estate.

As a result, people who have the following assets and circumstances should carefully consider some of the above strategies:

  • Consultants with significant earning potential
  • People with life insurance policies of at least $1 million
  • CPAs, engineers, IT professionals
  • People who stand to receive a large inheritance
  • Business owners and entrepreneurs
  • People with multiple rental properties
  • Partners in passive activities
  • Retirement accounts in excess of $1 million
  • Medical and healthcare professionals

The table below details some of the pros and cons of the Virginia tax system:

No estate taxProperty (real estate) tax
Lower income tax ratesIncome tax (not a high rate)
No gift or inheritance taxSales & use

How to Avoid or Reduce

Let’s examine at the 5 steps required to reduce or eliminate the tax:

  1. Consider the federal exemption

    Just because Virginia may not have an estate tax does not mean that you don’t potentially have a federal issue. The federal exemption is indexed each year for inflation. Ensure that you don’t lose sight of any federal or IRS rule changes.

  2. Review revocable and irrevocable trust options

    Trusts can play an important part of estate planning. They often result in filing a gift tax return. But the advantage is that you can do an estate freeze and lock in the gift at a much lower valuation. Trusts can be both revocable and irrevocable and they also have many different structures. A good estate attorney can help you determine what structure is right for you.

  3. Examine spousal gift strategies

    Thankfully, gifts can be divided between spouses. This allows you to double the gift exemption and not have to file a gift return for annul gifting. This is just one of many strategies that you can use to increase gifts. Depending on your estate size, this can reduce the need for revocable trusts and can lower tax preparation fees.

  4. Make gifts below the exclusion threshold

    Many people don’t realize that the gift tax exists, but it does. The IRS can impose hefty penalties for gifts, and most gifts are tax-free if they’re made to someone who is not on the higher tax bracket. Here are some of the ways to avoid paying the gift tax. Remember that the tax only applies when you give an asset to another person. The cost basis of an asset transferred as a gift transfers to the recipient.

  5. Review with CPA

    CPAs normally understand your situation better than others. However, they may not understand the estate filing requirements. But at least they have a good idea of your investments, business interests, real estate holdings, dependents and financial goals. As a result, it will be the best starting point for you.

Virginia tax structure

Virginia does have real estate taxes and of course sales tax and income tax. When you add all these together, Virginia is not exactly the most tax friendly state. Although we have seen worse.

But at least Virginia does not tack on an estate tax. Great news for wealthy taxpayers!

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