Estate planning should be viewed as an ongoing process. When you create your first estate plan, you are dealing with a certain set of circumstances. There are the conditions of your own life, and there are also societal circumstances that impact everyone.
Over the years, things change. You may have additions and subtractions to the family, and your financial position could change. Changes in marital status can also enter the picture. These evolving circumstances could call for estate plan updates.
Taxation is something to take very seriously when you are planning your estate. There is a federal estate tax that can have a big impact on your family’s financial future. The maximum rate of this tax is 40 percent, so the death tax looms large for high net worth families.
For the rest of 2014, the federal estate tax credit or exclusion is $5.34 million. You can pass along $5.34 million tax-free, but further transfers would potentially be subject to the estate tax.
There is a caveat to the above. The $5.34 million exclusion is used to give tax-free bequests to people other than your spouse. There is an unlimited marital deduction that allows you to leave any amount of money and/or property to your spouse tax-free.
You may look at the $5.34 million exclusion and breathe a sigh of relief because the value of your estate does not exceed this amount. While this is a good thing, you should be aware of potential changes to tax laws.
To take a walk down memory lane, let’s look at the way that the $5.34 million figure came about. At the end of 2010, a legislative measure set the estate tax exclusion at $5 million for 2011. There was an inflation adjustment in 2012 that brought the exclusion up to $5.12 million.
That measure expired at the end of 2012, but a new tax relief act was passed. This act supposedly made the exclusion amount permanent, and it allowed for ongoing adjustments to account for inflation. This is where the current $5.34 million exclusion is coming from.
People say that the estate tax rules are permanent because there is no particular date of expiration. However, there can always be changes to tax laws via legislative mandate. In fact, recent budget proposals coming from the White House called for a reduction in the estate tax exclusion.
If these proposals were adopted, the exclusion would go down to $3.5 million in 2018, and the maximum rate would rise to 45 percent.
We are not saying that these changes are definitely going to be implemented, but changes to tax laws are always possible.
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