Estate planning attorneys emphasize the fact that planning your estate is a dynamic process. It is not a “one and done” affair. You should create an ongoing relationship with your estate planning lawyer and be prepared to make changes to your plan over the years as things change.
Changes to the tax code could render your existing estate plan obsolete. With this in mind, you should be aware of some of the changes to the estate tax parameters that have been proposed within the President’s 2015 budget.
Proposed Expansion of Estate Tax
At the present time the amount of the estate tax exclusion or credit is $5.34 million. Your estate would not be subject to the death tax if it does not exceed $5.34 million in value.
The proposed budget for 2015 contains a reduction in the amount of the estate tax exclusion that would become active on January 1, 2018. The proposal calls for a $3.5 million exclusion. This was the amount of the exclusion back in 2009.
Increase In Maximum Rate
Speaking of 2009, during that year the top rate of the estate tax was 45 percent. Since 2011 the top rate has been 40 percent. This proposal would raise the maximum rate of the federal estate tax back to 45 percent. Once again, the change would go into effect at the beginning of 2018.
Change to Lifetime Gift Tax Exclusion
We have a federal gift tax that is unified with the estate tax. The $5.34 million exclusion that is in place in 2014 applies to gifts that you give along with the value of your estate. This means that you could potentially give away $5.34 million tax-free while you are still living.
The 2015 budget proposal would eliminate this possibility. Under the terms of the proposed budget, the lifetime gift tax exclusion would go down to just $1 million in 2018.
Wealth Preservation Strategies Targeted
There are additional provisions in the proposed budget that have estate planning implications. There are certain wealth preservation strategies that are utilized by high net worth families to mitigate estate tax exposure.
We will not get into all of the details here, but a number of these strategies are being targeted in the proposal. These would include the zeroed out GRAT strategy, the funding of trusts using the annual gift tax exclusion, dynasty trusts, and grantor trusts as a whole.
The Good News
The above is the bad news if you are concerned about your exposure to transfer taxes. The good news is that we are talking about proposed changes. Budgets must be agreed upon by legislators from both sides of the aisle. There will certainly be a great deal of resistance to these proposed changes to the tax code.
At the same time, you should be aware of the possibility of changes to tax laws and be prepared to adjust your plan accordingly.