There are some things that make you laugh so that you don’t cry, and the estate tax can fall into this category for some people. Life-changing amounts of money are in the balance, and it is a matter of pure chance whether or not your family members suffer devastating financial losses.
To explain let’s provide some hypothetical situations. Jennifer had an estate valued at $5 million back in 2009. Unfortunately she passed away during that year, and at the time the estate tax exclusion was $3.5 million and the maximum tax rate was 45%. The taxable portion of her estate was $1.5 million, taxed at 35%, and her family members had to pay $675,000 in estate tax.
As a result of the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 the estate tax exclusion is $5 million and the tax rate is 35% this year and next year. So if Thomas died last February with the same amount of money that Jennifer had, $5 million, his family would pay no estate tax at all. Clearly, Jennifer’s family may feel as though something is wrong with this since they lost a small fortune just two years before.
But it doesn’t stop there. This Tax Relief Act is scheduled to sunset at the end of 2012, and, as a result, beginning in January, 2013, the estate tax exclusion is scheduled to be reduced to just $1 million and the rate of the tax is going to skyrocket to 55%. It should be mentioned that it is possible that new legislation could pass to alter these parameters, but given the federal deficit passing such a measure could be difficult.
So, if Stan was to die in 2013 with the same amount of assets as Jennifer and Thomas, $5 million, $4 million of that would be taxed at a rate of 55% and his family would be presented with a $2.2 million tax bill.
So, in our example, in the span of just five years, one may pay $675,000, $0, or $2.2 million in estate taxes, based on the year they pass away. It’s hard to see how anyone could view this as being fair, but it is what it is. When you see how dramatically these changes can impact your legacy you can understand why it is important to stay in touch with your estate planning attorney on an ongoing basis.
Larry Parman
Author, President and Founding Attorney
Parman & Easterday
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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