The federal estate tax is not a factor for most people, however, it is a very big deal for high net worth families. This tax carries a 40 percent maximum rate, and this can equate to a great deal of wealth surrendered to the tax man.
To determine whether or not you are exposed to the tax, you want to compare the value of your estate to the estate tax credit or exclusion. In 2015, the exclusion is $5.43 million.
When you are inventorying your assets, you must include everything that you own, including your home and any other real property that you may own. Given the real estate values in the Bay Area, many people who don’t consider themselves to be mega-rich could be exposed to the federal estate tax.
We should also point out the fact that the value of life insurance policies that you personally own are also part of your taxable estate.
Estate Tax Efficiency
If you are exposed to the federal estate tax, there are ways that you can position your assets that would reduce your exposure. There are trusts that are used for estate tax efficiency purposes.
The trusts that are used to provide estate tax efficiency are irrevocable trusts. When you convey assets into this type of trust, you are surrendering incidents of ownership, because you cannot revoke the trust and take back the resources. As a result, when you fund an irrevocable trust, you are removing the assets from your taxable estate.
On the other hand, there are trusts that you would not want to use if you need to reduce the taxable value of your estate.
In addition to irrevocable trust, there are also revocable trusts. Revocable living trusts are very useful for a wide range of people, and the fact that you can revoke the trust is actually appealing to many, because there is no loss of control.
However, because you do retain this level of control, assets that have been conveyed into a revocable living trust are still part of your estate for tax purposes. Of course, this is not a problem if you are not exposed to the estate tax.
Estate Tax Report
To learn more about the federal estate tax and the steps that you can take to mitigate your exposure, download our special report. This in-depth report is free, and you can visit this page to access your copy: Report on Federal Estate Tax.
Schedule a Free Consultation
Our firm can help if you want to position your assets with estate tax efficiency in mind. We offer free consultations, and you can send us a message through our contact page to set up an appointment: San Jose CA Estate Planning Attorneys.