When you have accumulated a significant store of wealth, you may breathe a sigh of relief, because you have reached your financial goals. This is as it should be, but once you have had a moment to savor your success, you should ask yourself how you are going to preserve your wealth for the benefit of your loved ones.
Though many people question the fairness of the tax, there is indeed a federal estate tax that you must contend with as a high net worth individual. We have a marital deduction in the the United States that allows you to transfer unlimited assets to your spouse tax-free, as long as your spouse is an American citizen. Transfers to anyone else are potentially taxable.
This tax can significantly erode the legacy that you intend to hand down to your loved ones, because it carries a hefty 40 percent maximum rate.
Estate Tax Credit or Exclusion
The existence of this death tax is the bad news, but the good news is that there is a relatively significant estate tax credit or exclusion. This is the amount that can be transferred to anyone other than your spouse before the estate tax would become applicable.
A $5 million exclusion was put into place for the 2011 calendar year as a result of the enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. An inflation adjustment increased the amount of the exclusion to $5.12 million for 2012.
This act expired at the end of 2012, but at that time, the American Taxpayer Relief Act of 2012 was passed. Provisions contained within this piece of legislation made the base $5 million exclusion permanent, with ongoing adjustments to account for inflation. After a series of adjustments, the exact amount of the federal estate tax exclusion during the current calendar year is $5.43 million.
We used the word “permanent” in the previous paragraph. Though the inflation-adjusted $5 million figure is not going to expire under currently existing laws, it is not necessarily etched in stone forever. Laws are subject to change, and budgets that have been proposed by the White House would reduce the amount of the exclusion to just $3.5 million.
Because of the potential for changes to tax laws, you should always be aware of the current state of affairs so that you can adjust your existing estate plan if and when it becomes necessary.
Tax Efficiency Strategies
There are estate tax efficiency strategies that can be implemented if your estate is in taxable territory. If you would like to explore them, attend one of our upcoming seminars. The seminars are free, but we do ask that you register in advance so that we can reserve your seat. Click this link to obtain more information: Naples FL Estate Planning Seminars.