The federal estate tax is controversial, and there are those who would say that it is unfair, because it is an instance of double taxation. You pay taxes all of your life, and your estate is comprised of whatever you have left after paying these taxes. Why should the event of your death be a taxable one?
Though this may be a good question, the estate tax does not get all that much attention, because most people are not exposed to it. However, if your estate was subject to the estate tax and its 40 percent top rate, it would get your full attention.
The reason why most people do not pay the estate tax is because there is a relatively high credit or exclusion. During the current calendar year, the exact amount of the federal estate tax exclusion is $5.43 million. A $5 million exclusion was established for 2011, and this figure has been retained, but there have been ongoing adjustments to account for inflation.
We practice in the San Francisco Bay area, and real estate is quite valuable in this area as we all know. Since your home is part of your taxable estate, the value of your home alone could go a long way toward consuming your exclusion.
If the exclusion was to be reduced, the above would be all the more relevant.
The White House has issued its budget proposal for the 2016 fiscal year, and there is a provision within this proposal that you may want to keep an eye on if you are concerned about the federal estate tax. Under the proposed budget, the estate tax exclusion would be reduced to $3.5 million in 2017.
When you originally planned your estate, the plan was constructed based on a snapshot of the state of affairs at that time. If you were not exposed to the estate tax when you originally put your estate plan in place, there would be no reason to implement tax efficiency strategies. As a result, if a change such as this one was to be enacted, your estate plan could be in need of revisions.
You should always be aware of the ever-evolving tax code, and we should also point out the fact that an improvement in your own financial status could catapult your estate into taxable territory. Estate planning should be viewed as an ongoing process, and you would do well to review your plan incrementally to make sure that it is up to date.
Learn More About the Estate Tax
We have prepared an in-depth report that will provide you with detailed information about the potential impact of the federal estate tax. The report is free, and you can visit this page to access your copy: Free Estate Tax Report.