In general these are good days for those of us who worry about the federal estate tax. The federal estate tax exclusion was raised to $5 million under the American Taxpayer Relief Act of 2012. The exclusion is the amount below which, you pay no death tax at the federal level. This is a whole lot better than just a few years ago when the exclusion was millions of dollars less.
The law also included an annual inflationary adjustment. Now that the end of 2015 is nearing, the Internal Revenue Service has announced the estate tax exclusion adjustment for 2016. Next year, the federal estate tax exclusion will be $5.45 million. Again, this means that assuming you have made no taxable gifts during your life, you can leave any amount up to $5.45 million to any person or combination of people without having any federal estate tax deducted. That’s a good deal, because most of us do not have that much wealth.
But what if you do, or you might develop this level of wealth? In that case, this is a critical area of planning. The maximum rate of the federal estate tax is a whopping 40 percent. I hope that caught your attention. This is a great deal of money to come off the top of your estate before it is distributed to your family members. There are many different strategies which can be used to reduce potential tax liability and to facilitate the payment of the liability you do have with less pain. The key to all of these strategies is to work early with the appropriate estate planning attorney.
More Good News — The Unlimited Marital Deduction
Also in the good news category in connection with the estate tax is the federal estate tax marital deduction. This allows you to pass along unlimited assets to your spouse of the death tax. However, doing this is not an estate planning strategy in and of itself, because what you leave to your spouse — plus all the growth in the value of those assets over your spouse’s lifetime — could be subject to the estate tax after his or her passing. The current law allows you to leave your unused federal estate tax exclusion to your spouse with the proper tax filings. This means if you die with $3 million dollars passing to someone other than your spouse, you can avoid the estate tax by applying a portion of your $5.45 million exclusion, while passing on the $2.45 million you did not use to your spouse. Sound great? Sound complicated? Again, there are a lot of opportunities if you are working with experienced advisors. The best course of action will depend upon the circumstances, and you can explore your options if you set up a consultation with our firm.
You can send us a message through our contact page if you would like to get in touch electronically, or you can give us a call at 919-484-0012.
Mark Costley
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