Many people believe (falsely) that they will be subject to an estate tax on their deaths. This was a subject of much controversy over the past 15 years or so, but I think Congress have laid this issue to rest for the foreseeable future.
So where do we stand in 2016?
What has not changed is the unlimited spousal exemption. A married person may leave her entire estate to her spouse and no estate tax will be charged. This is huge. It matters not if the estate is $6 billion, if it’s left to the spouse the estate tax is zero.
This is a key civil rights issue when it comes to same-sex marriage. Our laws can and do treat married people differently, often in a way to encourage married relationships. If someone ever tells you that being able to marry doesn’t matter, don’t believe them. It matters.
Under old law, if one spouse did not use the full exemption at her death that value was lost forever. That is no longer true: the exemption is now ‘portable.’ If one spouse does not use up the entire exemption at death, the excess is available to the survivor.
Consider this example: a married couple owns $5 million of property jointly, and the husband and wife each own $2 million of property in their own respective names. Each names the other as the sole heir to their respective estate. Upon the first death, the joint property passes to the other spouse by law (that’s how joint property works) and the assets in his name pass by will. Now the survivor has an estate worth $9 million.
Since no tax was paid on the first death (because all of the property went to the spouse) the survivor now has her own exemption, plus the unused exemption from the first death. The exemption was transferred to the survivor.
For 2016, the federal exemption from estate and gift tax is $5,450,000 per person. For a married couple that means $10,900,00 can be passed by the two of them before any tax is owed. In our above example, the couple may leave their entire estate at that value to their heirs without paying any estate tax.
So the feds are going to cut you some slack on estate taxes. The IRS released data for 2014 that showed in the entire United States only 5,158 estate tax returns were filed and owed tax. Federal estate tax only affects a shrinking number of very wealthy families.
Charitable bequests are another area that enjoy an unlimited deduction from federal estate tax. Any person may leave as much as they wish to charity, and that value will not be subject to federal tax.
The states are another matter. Some states have their own estate tax which may or may not line up with the federal exemption. Maryland, for example, has a separate estate tax with an exemption of $2 million per person in 2016. Maryland charges its own 16% tax on estates above $2 million, with an exemption amount rising until it matches the federal exemption in 2019. DC has its own estate tax structure, and Virginia does not have an estate tax at all.
A basic estate plan is fundamental to any complete financial plan. Construct your documents in a way that assures the people you want will benefit from your estate after you’re gone. When you do so, enjoy the fact that affluent families are no longer required to do all sorts of gymnastics just in the name of avoiding taxes.
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