The recent State of the Union address that was delivered by the president included some insight into the budget that he was going to propose for 2016. This so-called “blue book” has been released, and we now know that an expansion to the federal estate tax is included in the budget proposal.
Before we explain the proposed change, we should look back a few years so that you can understand the current state of affairs.
At the end of 2010, a tax relief measure was passed, and it established a $5 million estate tax exclusion and a 35 percent top rate in 2011. An inflation adjustment was applied in 2012 that brought the exclusion up to $5.12 million.
The exclusion is the amount that you can transfer before the estate tax would be applied. As a result, if the value of your estate is less than the exclusion, you would not face exposure.
At the end of 2012, we were faced with the fiscal cliff dilemma. A compromise was reached in the eleventh hour, and the resultant legislation is called the American Tax Relief Act of 2012.
Provisions contained within that act made the estate tax exclusion that was put in place for 2011 permanent. Though the act was called a tax relief act, ironically, it raised the maximum rate of the estate tax to 40 percent.
There have been inflation adjustments annually since then, and after a series of adjustments, the estate tax exclusion during 2015 is $5.43 million.
This new budget proposal would decrease the amount of the federal estate tax exclusion to $3.5 million, so a lot more people would be exposed. The top rate of 40 percent would be retained, and the change would be implemented in 2017.
We should emphasize the fact that this is not something that is definitely going to happen. It is a proposal, and there will be significant resistance in the House and Senate. Many would say that it is highly unlikely that the proposal will become law, but there are no guarantees.
However, when you consider the implications, you can see why estate planning should be viewed as an ongoing endeavor. There are steps that you can take to mitigate your estate tax exposure, but you would not implement these strategies if you were not exposed to the estate tax when you originally created your plan.
If things were to change, revisions would be called for, so you should always understand the lay of the land and review your estate plan regularly.
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We should point out the fact that there is a state-level estate tax along with the federal estate tax, and the state exclusion is considerably lower than the federal exclusion. It is just over $2 million at the present time, so you could be faced with state-level estate tax exposure even if you are exempt from the federal tax.
If you would like to discuss death taxes with a licensed professional, our firm can help. We offer free consultations, and you can contact us through this page to schedule an appointment: Smithtown NY Estate Planning Attorneys.