We have seen some dramatic increases in real estate values over recent years. This is a very good thing if you are an investor or individual homeowner. But for some people, the increases activate an estate planning challenge.
Federal Estate Tax
The federal estate tax carries a 40 percent top rate. At that rate, it can significantly reduce the legacy you pass along to the next generation. That’s the bad news. The good news is the fact that there is currently a robust exclusion.
The exclusion is the amount that can be transferred tax-free before the estate tax is applicable. At the end of 2017, Congress enacted the Tax Cuts and Jobs Act, which increased the estate tax exclusion to $11.18 million for the following year. Currently, the estate tax exclusion is $11.7 million for 2021.
There is no estate tax on asset transfers to your spouse because there is an unlimited marital deduction. The marital deduction is only available to citizens of the United States.
The estate tax exclusion is portable, meaning it can be transferred between spouses. In other words, you may add your deceased spouse’s exclusion to your own personal exclusion if certain steps are followed.
The federal estate tax is unified with the gift tax. The $11.7 million exclusion that we have this year applies to your estate and lifetime gifts that exceed $15,000 per year, per person. This affords some opportunity for tax planning.
If you own property that has increased significantly in value, the estate tax can be a source of concern. While the exclusion is rather high, there are people in the Oklahoma City area that own ranches and other pieces of property that can be extremely valuable.
Pending Estate Tax Exclusion Reduction
The $11.7 million figure may allow you to be breathe a sigh of relief, but the number will get much smaller in the near future.
As mentioned, the record high exclusion is the product of the Tax Cuts and Jobs Act. This measure will expire at the end of 2025, and the exclusion will revert to the 2017 level of $5.49 million on New Year’s Day in 2026.
The number could be even lower. The For the 99.5 Percent Act has been introduced by Senator Bernie Sanders of Vermont. It calls for a $3.5 million federal estate tax exclusion. In addition, the proposed law would raise the tax rate to 45 percent for estates valued at $10 million or less. For larger estates, the rate would go to 50 percent, and max out at 65 percent for ten figure transfers.
State-Level Estate Taxes
It’s important to note that there are 12 states in the union that have state-level estate taxes. Oklahoma is not one of them. However, if you own valuable property in a state with an estate tax, your estate will be hit if the value of your property exceeds the state exclusion amount.
State-level exclusions are not in line with the federal exclusion, and they are typically quite a bit lower. For example, there is a $1 million exclusion in Massachusetts and Oregon.
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Need Help Now?
If you already know that you should work with an Oklahoma City estate planning lawyer, there is no time like the present. You can send us a message to request a consultation appointment, and we can be reached by phone at 405-843-6100.