The estate tax issue has basically been tabled. Senate Democrats pulled estate tax from their tax proposal to extend the Bush tax cuts for those making less than $250,000 per year. Evidently, the issue is too politically sensitive for politicians to handle; they would rather wait until after the election to create legislation. However, in this case, something happens whether they want it to or not: the estate tax levels and rates change.
Now that it is a virtual certainty that Congress will not act on the estate tax before at least November, it could be difficult for clients and professionals alike to do significant planning at that point. Thanksgiving and the December holiday period can make it difficult to accomplish much and will generally push contemplating one’s own mortality to one’s back of mind. However, with such a dramatic increase in the estate tax, it is important to consult with your tax advisor, your attorney, and with your financial planner now to determine whether any action should be taken.
Estate planners often say that nearly everyone in California is subject to the estate tax at a $1 million exclusion amount because real estate is more expensive than in other areas of the country: it is not uncommon for a California home-owner to have a $500,000 or more asset just to live in, which often requires its own special planning. However, it’s important to remember that for estate tax purposes, the home is only worth its net value. If you own a $500,000 home and have a $400,000 mortgage, for example, your home is only worth $100,000 for estate tax purposes. In these next few months, take a really good look at what the net value of your estate would be tomorrow. Is it over $1 million?
Your tax advisor can help you determine whether you would have a taxable estate with an estate tax exclusion amount of $1 million. Depending on your assets, the rules can get fairly involved. If you find that you could have a taxable estate, the next steps are:
1) If you are married consider whether you still have a taxable estate if you double your estate tax exclusion amount to $2 million. If not, verify that your trust is an A-B trust, which will allow each spouse to each use the full $1 million estate tax exclusion amount, even if Congress does not extend portability past this year.
2) If you are unmarried, or if you are married and your estate still exceeds $2 million (with an A-B trust), consider your realistic appreciation in asset value and living expenses. If you will spend your estate below the applicable exclusion amount, then verify with your estate planning attorney that your trust continues to meet your needs. However, you might also consider annual gifting, depending on your life expectancy.
3) If you find that your estate significantly exceeds the new applicable exclusion amount, you should discuss your options with your estate planning attorney before the end of the year. You might consider using your higher exclusion amount this year, life insurance, irrevocable trusts, or other tools to help protect and preserve your estate for your heirs. You might also consider keeping your current plan in place, given the proposals to revert to the $3.5 million exclusion amount ($7 million for a married couple with an A-B trust).
The waiting is over. The time to really assess your estate tax situation with your professionals is now.
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