Wealth preservation is a serious consideration for high net worth individuals. Reaching your goals is only part of the equation. There are forces of asset erosion out there that can significantly reduce the financial legacy that you are leaving behind for the benefit of succeeding generations.
There is a federal estate tax in place, and it carries a very hefty 40 percent maximum rate. At the time of this writing in 2014, the estate tax credit or exclusion is $5.34 million.
If the value of your estate exceeds $5.34 million, you are faced with potential estate tax exposure as the laws currently stand.
We should point out the fact that there is also a federal gift tax, and it is unified with the estate tax. The tax exists to close a loophole. If there was no gift tax, you could simply give gifts while you are living to avoid the tax.
The $5.34 million exclusion is a unified exclusion. It applies to lifetime gifts that you give along with the value of the estate that you are transferring to your heirs.
A $5 million exclusion was put into place for the 2011 calendar year after the passing of a tax relief act at the end of 2010. At that time, the top rate of the tax was 35 percent. There was an adjustment to account for inflation in 2012, and this brought the exclusion up to $5.12 million. The maximum rate remained constant at 35 percent.
The legislation that mandated these parameters expired at the end of 2012. A new tax act was passed at that time. It retained the base $5 million exclusion with ongoing adjustments to account for inflation. The top rate was raised to 40 percent.
These parameters are supposed be permanent in the sense that there is no particular expiration date. However, the word “permanent” is not literally accurate.
Changes to tax laws can always come down the pike. The White House has proposed changes to the estate tax parameters that would take effect in 2018. If these proposals were to become law, the estate tax exclusion would go down to $3.5 million, and the rate would rise to 45 percent.
This proposal would also impact the unification of the gift tax and the estate tax. The lifetime gift tax exclusion would go down to just $1 million.
To be clear, these are proposals that have not been adopted. However, tax laws can change, and you should always be aware of the current state of affairs.
If you have estate tax concerns, our firm can help. There are tax efficiency strategies that can be implemented, and the ideal plan will vary depending on the circumstances.
To schedule a free consultation, send us a message through this page: Campbell CA Estate Planning Attorney.