We have been experiencing a housing boom the United States over recent years. Values have gone through the roof in some areas, and this will definitely put a smile on your face if you are a homeowner or investor.
At the same time, there is a potential downside from an estate planning perspective.
Federal Estate Tax
The federal estate tax looms large for high net worth individuals because it carries a 40 percent maximum rate. It is only a factor for people that have accumulated a significant store of wealth because there is a robust exclusion.
This is the amount that can be transferred before the estate tax would be levied on the remainder. In 2011, a $5 million exclusion was established via legislative mandate, and this figure adjusted for inflation remained intact through 2017.
In December of that year, the Tax Cuts and Jobs Act was passed and signed into law by the president. It established an $11.16 million exclusion for 2018, and since then, the figure has been indexed for inflation. This year, the exclusion stands at $11.7 million.
There is an unlimited marital deduction, so there is no taxation on transfers between spouses as long as the people involved are American citizens. The exclusion is portable, and this means that the surviving spouse can use the exclusion that was allotted to their deceased spouse.
You may consider lifetime gift giving as a way to avoid the estate tax, but that window of opportunity was closed in 1932 when the gift tax was enacted. The gift tax and the estate tax are unified, so the multimillion dollar exclusion includes lifetime gifts.
In addition to this unified lifetime exclusion, there is an additional $15,000 per person, per year exclusion. You can transfer this much to any number of people in a given year tax-free, with no limit to the total amount of money that you can give.
There are some states that have state-level estate taxes to contend with as well, but Michigan is not one of them. However, if you own valuable property in a state with its own estate tax, it would apply to your estate if its value exceeds the exclusion.
State-level exclusions are typically much lower than the federal exclusion. For example, in Massachusetts and Oregon, the exclusion is just $1 million.
If you own real estate that has increased dramatically in value over the years, estate taxes could be a factor for you, and the likelihood may increase sooner rather than later.
A provision that is contained within the Tax Cuts and Jobs Act that increased the exclusion is going to sunset on January 1, 2026. At that time, the exclusion will go back down to the 2017 level, which was $5.49 million.
This is already a done deal, but there can be a more significant change in the meantime. The For the 99.5 Percent Act has been introduced by Senator Bernie Sanders of Vermont. It would reduce the estate tax exclusion to $3.5 million.
In addition to the exclusion reduction, the measure would raise the rate. It would go up to 45 percent for taxable estates that are valued at $10 million or less, and it would graduate from there. The maximum rate would be 65 percent for estates that exceed $1 billion in value.
Another change would limit the annual tax-free gift giving. People use this exclusion to fund irrevocable trusts and family limited partnerships for tax efficiency purposes. This bill would limit gifts to these entities to a total of $15,000 a year.
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We can help you implement an estate tax efficiency strategy if this is a source of concern for you. And of course, we can be engaged to work with you to develop an effective estate plan if your estate will not be subject to taxation.
There are many approaches that can be taken, and the right way to proceed will depend on the circumstances. Personalized attention is key, and this is what you will receive when you choose our firm.
You can schedule a consultation at our Cincinnati estate planning office if you call us at 513-721-1513, and you can use our contact form to send us a message.