Determining whether or not your estate is vulnerable to the estate tax is one of the things that you must consider when you engage in the process of estate planning. On the surface this would seem like a rather straightforward task, but the reality is that pinning down the estate tax exclusion amount is quite a challenge. There are those who would suggest that the matter is so absurd it could almost be considered humorous if it was not for the life-changing sums of money that are at stake.
Let’s take a walk down memory lane just a few years back to explain what we are talking about. In 2008 the estate tax exclusion was $2 million and the maximum rate of the tax was 45%. So if you passed away that year with an estate that was valued at $5 million, $3 million of that would have been taxed at a rate of 45%. So your heirs would have been required to pay the IRS $1.35 million of that total $5 million inheritance.
In 2009 the rate of the estate tax remained constant at 45%, but the estate tax exclusion was raised to $3.5 million. So if you would have passed away during that year with $5 million your family would have been presented with a $675,000 tax bill. That is quite a swing. During 2010 the estate tax was repealed. Now, in 2011 and 2012, we have a $5 million estate tax exclusion – so if you pass away during one of these years your $5 million estate would not be taxed.
However, if no new laws are passed in the meantime, the estate tax exclusion returns to $1 million in 2013 and the rate of the tax will rise to 55%. So as the law stands right now, if you were to pass away on New Year’s Eve in 2012 with a $5 million estate it would not be taxed at all. But if you were to die the next day, $4 million of your $5 million estate would be subject to a 55% federal death levy. That means your heirs would get $2.8 million, and the government would get $2.2 million.
If you can make sense of this and explain why it is fair you would probably be the first person able to do so. This is why it is so important to engage the services of an estate planning attorney and keep in touch on an ongoing basis as these parameters continually change so drastically.