There are only two full months remaining in the year before a huge increase in the federal estate and gift tax is set to be imposed. Depending on the size of your estate, you may want to consider estate planning and gifting strategies immediately in order to take advantage of the current rates. Right now, it is possible to give away over $5.12 million to your family members with tax-free annual gifting and “taxable gifts” without paying a dime in taxes. If you are married, you can give away over $10.24 million. For most people, such numbers are unfathomable. Having a taxable estate over $10 million is, itself rare, but having an estate so much over $10 million that you can afford to give away that much is even more so. However, for people who are in this position, time is running out to take action. Even if you do not actually execute your documents and make your transfers until the end of December, you must meet with your attorney and advisors as soon as possible to begin creating the plan.
However, for the vast majority of people who do not need to take advantage of such large gifting propositions in order to protect their estates from tax, the estate tax may still be a factor in your financial and estate plans. At the end of the year, assuming Congress does not act, the estate tax applicable exclusion amount will be dropped to $1 million ($2 million for married couples). Although $1 million still seems like a large sum, a few important assets could cause an estate tax nightmare that you are not currently considering. Working with your attorney to evaluate your plans may help you rest more easily.
For example, if you have or are considering life insurance, the policy will be included in your estate for estate tax purposes, even though it is exempt for income tax purposes. Depending on your age and level of health, it may be possible to obtain life insurance for $500,000-$1 million at a fairly reasonable price. Doing so, however, could subject your taxable estate to high tax rates, up to 55% (or maybe more depending on what Congress does or does not do).
Similarly, although your taxable estate will generally include the “net” value of your assets (e.g. your home value minus your outstanding mortgage), your net value will change over time. For example, if you are a recent graduate or a young parent, it is likely that you have a lot of debt to offset your assets. Additionally, given the political climate and frequent changes in estate tax law, it may not be as important to plan on estate tax savings as it is to plan for guardians for your children. However, for many baby boomers and elderly San Diegans, you have seen your property values rise exponentially over prices from 30 years ago and likely have a substantial amount of equity. In the estate tax world, that equity is included in your gross estate, even though it may be excluded from income tax upon sale. Your home, combined with your other assets may create a taxable estate for you.
Because of the drastic decrease in the amount you can exclude from estate tax, it is worth looking over your financial picture and your current estate plan as soon as possible, before the new estate tax regime goes into effect!
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