Monday, September 29, 2014

Will I be Subject to the Estate Tax? What About Other Taxes?

Much attention has been devoted to the Federal Estate Tax (a/k/a "Death Tax") over the past 15 years.  After much uncertainty, a December 2012 political compromise made permanent the current version of the tax.  This brief post does not delve into the complexities of the estate tax, but deals with two common questions:

1)  Am I likely to have to pay the federal estate tax?

2)  If I don't have to worry about the federal estate tax, are there still other death-related tax rules that might apply to me?

1) Am I likely to have to pay the federal estate tax?

In 2014, individuals with estates up to $5.34 million are not subject to the federal estate tax.  This exemption amount is indexed to inflation, so it should go up over time.  For married couples, if the first spouse to die does not use the $5.34 million exemption, the second spouse can combine it with his/her exemption for a total of a $10.68 million exemption for the couple.  However, a couple must follow applicable formalities, such as filing an estate tax return after the first spouse's death.

Additionally, transfers from one spouse to the other are also generally exempt from estate taxation, regardless of their amount.  For example, a wife could give $600 million at death (or during her lifetime) to her husband without federal estate tax consequences.  There are exceptions to these rules, perhaps the most prominent being property passed to a spouse who is not a United States citizen

If your net worth is even close to the estate tax exemption amounts, or you have special circumstances (like a non-citizen spouse, prior gifts of large value, etc.), it is imperative that you discuss possible estate tax-avoidance strategies (such as lifetime gift-giving or QDOTs, respectively) with an estate planning attorney.

2) If I don't have to worry about the federal estate tax, are there other death-related tax rules that might apply to me?  Answer:  Yes.

If you only remember one point from this blog post, remember this:  Estate tax (the tax on transfer of your wealth at death) is only one form of taxation that impacts estate planning.  Although the vast majority of Americans pay no federal estate tax, most Americans do pay federal income tax (which includes investment gains).  In my last blog post, I discussed an enormous income tax loophole, known as the automatic step-up in basis at death.  Taking advantage of that income tax benefit alone can easily save a family hundreds of thousands of dollars in income tax, even if they have nowhere near the net worth to worry about the estate tax.

Also, be aware that many states have estate tax exemption amounts that vary from the federal rates.  For example, the 2014 Illinois estate tax exemption is $4 million for an individual, where the federal exemption is $5.34 million.  So, for example, a Naperville resident who dies with $5 million in property would owe Illinois taxes (on $1 million that is above the $4 million exemption) but no federal taxes (because the value of the estate is below the $5.34 million federal exemption).  Every state's rules are different.

In conclusion, tax planning is a crucial component of a solid estate plan.  An estate planning attorney can help tailor an estate plan to your family's needs, incorporating the latest information about federal and state tax laws.

Published by the Law Office of Ian Holzhauer in Naperville, IL.  

Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 


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