We have a diverse economic landscape in Southern California, but at the higher end of the spectrum, there are positions that pay exorbitant salaries. There are countless major corporations, and this is the home of the entertainment industry, so there is some big money being made every day in the television, music, and motion picture sector.
It is also a major hub of professional sports, so we have more than our fair share of elites that have tens of millions of dollars at minimum living in and around Los Angeles.
Clearly, this is what it’s all about, because everyone wants to make a good living, regardless of the extent of your capabilities. This being stated, there is an estate planning facet to seriously consider if you are residing in the financial stratosphere.
Federal Estate Tax
You get to enjoy your life to the fullest when you have no limitations financially, and this is certainly a great personal reward. In addition to your own advantages, you have the ability to pave the way for your loved ones if you have been able to accumulate a robust legacy.
Whether you are wealthy, middle-class, or on the lower end of the income scale, you pay taxes throughout your life. There are income taxes, sales tax, property tax, capital gains tax, etc.
Since you pay a never-ending stream of taxes while you are living, and the numbers get quite high if you are wealthy, you would think that you have paid enough by the time that you pass away.
An additional tax that is triggered by the event of your death seems like an instance of double taxation. After all, your property was acquired with after-tax earnings. You have already paid your taxes, so why should money that has already been taxed be taxed once again?
On a purely logical level, it is difficult to contend that the estate tax is fair, but nonetheless, it is a fact of life. Plus, in addition to the questionable nature of its existence, you have to wonder about the maximum rate, which seems almost punitive. It is 40% at the time of this writing.
Estate Tax Exclusion
The reason why the estate tax is only a factor for high net worth individuals is because of the credit or exclusion. This is a certain amount that can be transferred tax-free before the estate tax would be applied on subsequent transfers.
At the time of this writing in 2019, the exact amount of this exclusion is $11.4 million. Each year there are adjustments to account for inflation, so it is likely that the figure will be somewhat higher next year. To provide some insight with regard to what to expect, in 2018 the exclusion was $11.18 million.
If you are married to an American citizen, you have the right to use the unlimited marital deduction. This gives you the ability to transfer any amount of property to your spouse free of taxation. Of course, this is not an estate planning strategy in and of itself, because the spouse would be faced with estate tax exposure.
This being stated, there is an advantage when these circumstances exist in the form of portability. The surviving spouse can add the exclusion that was allotted to his or her deceased spouse to their own, so you are looking at $22.8 million for a surviving spouse using the parameters that are currently in place.
Your first thought when you hear about the estate tax is naturally going to be lifetime gift giving to circumvent the death levy. To close this loophole, there is a federal gift tax, and it is unified with the estate tax. The exclusion is a unified exclusion that applies to lifetime gifts along with your estate when it is being transferred to your heirs.
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