The federal estate tax can be a factor for you if you will be transferring a significant amount of wealth to your loved ones. This tax is only a factor for high net worth individuals because there is a credit or exclusion that is relatively high. The exclusion is the amount that you can transfer tax-free. Any portion of your estate that exceeds the amount of this exclusion can be subject to taxation.
Before we proceed, we should point out the fact that there is an unlimited marital deduction. If you are married to an American citizen, you can transfer any amount of property to your spouse free of transfer taxes, but transfers to others can be taxed.
We should provide some history so that you understand the lay of the land when it comes the federal estate tax exclusion. During the 2010 calendar year, there was no estate tax, because a one-year repeal was included in the Bush era tax cuts.
Throughout that year, there was a lot of hand wringing within the estate planning community, because the estate tax was scheduled to return in 2011 with an exclusion of just $1 million. When you consider the fact that your real property and your life insurance policy proceeds are part of your estate, that is not a very big number.
Fortunately, a tax relief act was passed at the end of 2010, and it allowed for a $5 million exclusion and a 35 percent top rate. This measure, that is now called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, held sway for just two years. It was scheduled to expire at the end of 2012.
The legislative measure allowed for ongoing adjustments to account for inflation, so the 2012 exclusion was $5.12 million. During that year, the same situation existed with regard to the impending $1 million exclusion. If nothing was done by legislators to change existing laws, the exclusion would revert back to $1 million in 2013.
At the very end of 2012, the American Taxpayer Relief Act of 2012 was passed and signed into law, and it made the inflation-adjusted $5 million exclusion that was established for 2011 permanent. Even though the measure is called a tax relief act, it actually raised the maximum rate of the estate tax to 40 percent.
Since then, there have been inflation adjustments each year, and they have been no less than $90,000. Things are going to be different this time around. The IRS has announced that there will be a $20,000 inflation adjustment for 2016. Throughout 2015, the estate tax exclusion has been $5.43 million, so next year the number will be $5.45 million.
Wealth Preservation Consultation
There are strategies that can be implemented to preserve your wealth if your estate is going to be subject to taxation. To explore your options, contact us through this page to set up a consultation: Indianapolis IN Estate Planning Attorneys.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.