There is a very relevant article appearing on the Forbes website that explains some of the details about the 2015 budget proposal that has been presented by the White House. High net worth families who are potentially exposed to the estate tax should certainly be aware of these proposals.
Return to 2009 Levels
Back in 2009, the amount of the federal estate tax exclusion was $3.5 million. The maximum rate of the estate tax was 45 percent. Due to provisions contained within the Bush era tax cuts, the estate tax was repealed for 2010.
At the end of 2010, a piece of legislation called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was enacted. Under provisions contained within this measure, the estate tax returned in 2011 with a $5 million exclusion and a 40 percent maximum rate.
The exclusion was adjusted to $5.12 million to account for inflation in 2012.
At the end of 2012, another tax relief act was passed that is called the American Taxpayer Relief Act of 2012. This act supposedly made the estate tax exclusion of $5 million with ongoing inflation adjustments permanent. After the most recent adjustment, the amount of the estate tax exclusion in 2014 is $5.34 million.
The 2015 budget proposal that has been released by the White House would set the estate tax parameters back to the 2009 levels. The estate tax exclusion would go down to $3.5 million, and the top rate would go up to 45 percent. These changes would take effect on January 1, 2018.
Impact on Lifetime Gifting
The federal gift tax is unified with the estate tax. The $5.34 million exclusion applies to your estate coupled with the gifts that you give throughout your life. This means that you could potentially give gifts totaling $5.34 million throughout your life tax-free.
If this proposal was to become law, there would be another significant change. You would no longer be able to give lifetime gifts that were equal to the amount of the unified exclusion. The limit on tax-free lifetime gifting would go down to just $1 million.
There are certain strategies that are implemented by people who are looking for estate tax efficiency. This 2015 budget proposal takes aim at some of these strategies. There are proposed changes to tax laws that would decrease the effectiveness of some of them. In fact, dynasty trusts would be abolished altogether.
Awareness Is Key
When you first put a plan in place, you should not view it as something that is permanent. Changes can come down the pike that render your existing estate plan obsolete.
This budget proposal is just that, a proposal. These changes may never be implemented. However, you should stay in touch with your estate planning attorney and be prepared to make the appropriate revisions if changes that impact you are enacted.