The federal estate tax looms large as a source of asset erosion, and if the laws stay the same as they are right now large numbers of families who are presently exempt from the tax will become subject to it. As of this writing the estate tax exclusion stands at $5 million, and the top rate of the tax is 35%. These parameters came about due to provisions contained in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which was passed in December of last year.
This tax relief act is scheduled to expire when 2012 comes to a close. In 2013 the estate tax rate will increase to 41%- 55%, and the exclusion is set to be reduced to $1 million. Most people who are planning for the future are not expecting to die within the next year, so when you are evaluating your potential exposure to the estate tax you may want to work with this $1 million figure.
It is of course possible that yet another tax relief measure could pass between now and the beginning of 2013 that would increase the estate tax exclusion. However, as everyone is well aware we are in the midst of a budget crisis. A lot of people are calling for increased revenue as a way to reduce the federal debt.
In fact, a Congressional super committee has been charged with the responsibility of reducing the debt by $1.5 trillion over the next 10 years. Things like cuts to Medicare and Social Security are being seriously considered. So it may be difficult to convince some people that estate tax relief should be a priority given the desperate calls for deficit reduction.
The suggestion here is to be proactive about protecting your family from the ravages of the estate tax. Get together with an estate planning attorney and create a legacy plan that provides you with estate tax efficiency so that your loved ones don’t watch a significant portion of their inheritances go down the drain.