The federal estate tax currently carries a maximum rate of 40 percent, and the amount of the exclusion is $5.34 million. These parameters were supposedly made permanent when the American Taxpayer Relief Act of 2012 was enacted.
Of course, nothing is truly permanent when it comes to tax laws. Each year a budget must be passed, and there are always going to be proposed changes to existing laws.
With this in mind, a new budget has been proposed for 2015 by the White House. Provisions contained within this budget proposal would have a significant impact on the estate tax parameters.
Turning Back the Clock
It appears as though the White House would like to turn back the clock. During the 2009 calendar year the amount of the federal estate tax exclusion was $3.5 million. The maximum rate of the estate tax was 45 percent.
The proposal that has been released by the President calls for a return to these parameters. Although the proposed changes are contained within the 2015 budget, these adjusted parameters would not go into effect until January 1, 2018.
If the changes were enacted, many more people would be exposed to the estate tax.
Gift Tax Exclusion Reduced
In addition to the estate tax there is also a federal gift tax. If there was no gift tax, you could simply give assets to your heirs while you are still living to avoid the estate tax. The gift tax and the estate tax are unified, so they each carry the same 40 percent rate in 2014.
The $5.34 million exclusion that we discussed earlier is a unified exclusion. It applies to gifts that you give while you are living in addition to the value of your estate as it is being transferred to your heirs after you die.
This means that you could choose to give as much as $5.34 million in tax-free gifts during your life. Of course, if you do this the entirety of your estate would be exposed to the estate tax.
One of the provisions that is contained within the 2015 budget proposal would change the gift tax exclusion. At the beginning of 2018 it would go down to just $1 million.
Other Relevant Revisions
There are other provisions contained within the budget proposal that would affect estate planning for high net worth families. They involve targeted changes to certain laws that would reduce the effectiveness of a number of tax efficiency strategies.
Proposal vs. Law
This is some disturbing news for many, but it is important to remember that these changes are merely proposals. Budget negotiations are contentious, and there will be legislators who are vociferously opposed to these changes to the tax code.
At the same time, you have to be aware of the potential for change and be prepared to adjust your estate plan if and when it becomes necessary.