When you find that you are in a position to leave behind a considerable legacy, you can breathe a sigh of relief and enjoy your success in innumerable ways. This being stated, there may be a looming threat that you should address in the form of the federal estate tax.
Most people are exempt from this tax because there is a credit or exclusion that is quite high relative to the value of the typical estate. This is the amount that can be transferred before the estate tax would become applicable. It was set at $11.18 million as part of the tax reform package that went into effect in 2017.
Since then, there have been annual adjustments to account for inflation. Throughout last year, the estate tax exclusion was $11.4 million. Now that we are in 2020, another adjustment has been applied by the IRS. For the remainder of this year, the exact amount of the federal estate tax exclusion is $11.58 million.
Implications for Spouses
Prior to 2011, the estate tax exclusion was not portable between spouses. The term “portability” when used in this context defines the ability of a surviving spouse to use the exclusion that was allotted to their deceased spouse.
The lack of portability was considered to be unfair by many, because in many if not most cases, two people accumulated the wealth in question. Why should the survivor have just a single exclusion to utilize?
In 2011, a tax reform bill that was enacted made the exclusion portable, and this provision has been retained since then. Using the $11.58 million per person figure that is in place this year, a surviving spouse would have a total exclusion of $23.16 million.
It should also be noted that there is an estate tax marital deduction. You can use this deduction to transfer unlimited assets to your spouse free of the federal estate tax.
Federal Gift Tax
If you are going to be exposed to the estate tax, lifetime gift giving would naturally come to mind. This is an option on a limited basis, but it is not a comprehensive solution, because there is a gift tax in place. It is unified with the federal estate tax, so the $11.58 million exclusion is a unified gift/estate tax exemption.
However, there is an additional gift tax exclusion that you can take advantage of to give tax-free gifts each year without using any of your unified lifetime exclusion. This is the annual $15,000 per year, per person exemption. You can give this much to any number of people within a calendar year in a tax-free manner.
State-Level Estate and Inheritance Taxes
There are some states in the union that have state-level estate taxes, but fortunately for us here in the Golden State, we are in the clear, with one caveat. If you own property in a state that does have its own estate tax, it could be a factor for you, even if you live in California.
For example, there are people in our area that own property in Hawaii. There is a state estate tax in that state. If you pass away and the value of the property is in excess of the state level exclusion there, your estate administrator would be required to address the matter.
Many people would naturally assume that an inheritance tax and an estate tax are one of the same thing, but this is not the case. As we have explained, an estate tax is applied on the entire taxable portion of an estate. An inheritance tax can be levied on each transfer to individual nonexempt inheritors.
There is no federal inheritance tax, and there are only a handful of states with state-level inheritance taxes. California is not one of them.
Schedule a Consultation Today!
While it is true that the federal estate tax impacts a very small percentage of people, careful, informed estate planning is important for everyone. There is no cookie-cutter, one-size-fits-all plan, because every case is different. We would be more than glad to gain an understanding of your situation and make the appropriate recommendations.
You can call us right now at 310-337-7696 to set up a consultation appointment. There is also a contact form on this website that you can use to send us a message.
Cesar has received his Masters of Science in Integrated Design, Business and Technology from the University of Southern California.
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