The new year is a good opportunity to reconsider your estate planning needs. You should periodically review, and if necessary revise, your will, trust, and other estate planning documents such as a durable power of attorney, to keep your affairs current. Among other things, changes in the law may alter your estate planning needs.
What is the Estate Tax?
One of the most important laws affecting estate planning is the estate tax. This is a federal tax levied against the total value of a person’s assets upon their death. A handful of states also levy their own estate tax, although California does not. However, if you own property in a state where such a tax is still assessed, you will need to account for that in your estate planning.
The estate tax is also more accurately described as a “gift and estate tax.” The idea here is the federal government does not want people simply giving their property away just before they die in order to avoid the estate tax. So gifts you make to persons over a certain amount may also be taxable.
Do I Need to Worry About the Estate Tax?
In reality, most of us will never have estates large enough to qualify for the estate tax. The federal government exempts a certain portion of every estate from the tax. For 2016, this exemption amount is a generous $5.45 million. This means if you pass away in 2016 and the total assessed value of your estate and any taxable gifts is less than $5.45 million, your estate will owe no federal estate tax. Any amount above the $5.45 million exemption, however, will be taxed at a rate of 40%. And as noted above, some states assess their own estate tax, which may have exemptions lower than the federal amount.
How Would the Estate Tax Affect My Spouse?
On top of the $5.45 million deduction for all estates, the government also provides an unlimited exemption for property left by one spouse to another. This “marital deduction” means even the wealthiest estate may pass to a surviving spouse tax-free. Of course, once the surviving spouse dies, his or her estate may then owe a significant estate tax bill.
On the other hand, a 2011 federal law allows a surviving spouse to take advantage of any unused portion of the deceased spouse’s exemption. For example, say a couple jointly owns $7 million in assets. The first spouse dies and leaves everything to the survivor, so thanks to the marital deduction there is no estate tax due. When the surviving spouse dies, she is entitled to not only use his or her own $5.45 million deduction, but also the other spouse’s unused $5.45 million deduction, meaning the $7 million estate is still exempt from tax. In other words, portability can effectively double a married couple’s total exemption.
What About Gift Taxes?
Under federal law, you can make annual gifts of $14,000 to as many individuals as you wish without incurring any gift tax liability. The $14,000 limit is per person, so if you have three children, you could give each of them that amount every year. And as with your estate, you can make unlimited gifts to your spouse. Any gifts you make beyond these (and a few other) exclusions are counted against your $5.45 million estate tax exemption.
Need Advice on Estate Planning?
Even if you are not worried about the estate tax, you no doubt have many other estate planning questions. An experienced San Diego estate planning attorney can help answer these questions. Contact the Law Office of Scott C. Soady today if you would like to speak with someone about your estate planning needs.