One of the most important things to ascertain when you start to get serious about planning for your future is whether your estate is going to be potentially exposed to the estate tax. This sounds like something that would be rather easy to do, but the reality is that the playing field changes on a regular basis and this leads to some rather bizarre scenarios that leave many people scratching their heads.
Let’s take a walk down memory lane for a moment. Back in 2009 the estate tax exclusion was $3.5 million and the rate of the tax was 45%. Say that John had an estate valued at $5 million and he passed away during that year. The taxable portion of his estate would be $1.5 million, so it would be taxed at 45% and his family would be liable for a $675,000 tax bill. Clearly, this is a life-changing sum of money for most people.
This year the estate tax exclusion is $5 million, and the rate of the tax is 35%. These parameters came about due to the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. So if you were to die this year with an estate worth $5 million like the estate of John, your family wouldn’t have to pay any estate tax at all even though John’s family had to pay $675,000 on the same amount of money just two years ago.
This act is going to sunset at the end of 2012, and in 2013 the rate of estate tax is going to go up to 55% and the exclusion is going to go down to just $1 million. So if Liza was to die in 2013 with that same $5 million legacy, a 55% federal tax would be levied on the taxable portion, which is $4 million. As a result Liza’s family would have to pay the federal government $2.2 million out of that $5 million inheritance.
As you can see, with the estate tax, timing is everything. The wise course of action is to meet with your estate planning attorney regularly to make the appropriate adjustments as these changes come down the pike.