High net worth individuals must be very aware of the potential impact of the federal estate tax. This tax carries a maximum rate of 40 percent, so it can take a heavy toll on the financial legacy that you are leaving behind to your loved ones.
There is a federal estate tax credit or exclusion, and it divides those who must pay the tax from those who are exempt. During the 2014 calendar year, the estate tax exclusion is $5.34 million. Next year you may see a somewhat higher figure if an inflation adjustment is applied.
If a portion of your estate exceeds the amount of this exclusion, that portion will potentially be subject to taxation.
Estate Tax Exclusion Portability
Each taxpayer is afforded a $5.34 million estate tax exclusion in 2014. As a result, if you are married, you have a $5.34 million exclusion, and your spouse has his or her own $5.34 million exclusion.
This raises a question: what happens to the exclusion that was allotted to a deceased spouse? This is the matter of estate tax exclusion portability.
Traditionally, the estate tax exclusion was not portable between spouses. Many people thought this was unfair, because the resources in question were accumulated by the efforts two different individuals.
A tax relief act was passed at the end of 2010 that is called the the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. A provision contained within this measure made the estate tax exclusion portable in 2011 and 2012.
Portability was made permanent when the American Taxpayer Relief Act of 2012 was passed. A surviving spouse can now use the exclusion that was allotted to his or her deceased spouse.
Stay Abreast of Current Laws
When you hear about the $5.34 million exclusion, you may be unconcerned about death taxes because your assets do not exceed this amount. Even if you are not exposed to the estate tax today, you should still be concerned, because laws can and do change.
In fact, the last two budgets that were proposed by the White House included reductions in the amount of the estate tax exclusion. These proposals called for a $3.5 million exclusion that would be implemented for the 2018 tax year.
We would like to emphasize the fact that these were proposals, and there are no pending changes. However, this is an evolving matter. You should always stay aware of the current state of affairs so that you can adjust your plan if and when it becomes necessary.
Free Wealth Preservation Consultation
If you are exposed to the federal estate tax, there are tax efficiency strategies that can be implemented to mitigate your exposure. The optimal course of action is going to vary on a case-by-case basis.
We offer free wealth preservation consultations to people in the greater San Jose area. To set up an appointment, send us a message through our contact page.