If you are worried about the federal estate tax, it is a good problem to have. It means that your asset level is above the limits brought about by the new tax laws. That wasn’t the way things were 10 or 20 years ago, when federal estate tax limits were much lower. As a result, many middle-class families found themselves with big estate tax issues, when estates were settled. A recent article in the Rome Sentinel addresses the estate tax from an historical perspective and what you need to know about it today. The article is titled “2019 update: Should you be concerned about the estate tax?”
For starters, there are many loopholes and nuances in the tax laws. Therefore, every situation is different. Your estate planning attorney will be able to review your individual situation and work with the laws of your state to make sure that your estate plan works for your family and minimizes your estate tax liability.
The estate tax concept is based on laws from past centuries, when the goal was to limit the amount of property that individuals could pass from one generation to the next. The estate tax is now government’s way of saying you had too many assets, or assets that could not be fully valued or taxed, except upon your death. After death, the net worth of your estate is calculated by valuing your assets minus any liabilities.
Assets are counted as anything of value. However, they include: cash, insurance policies, stocks, bonds, real estate, annuities, brokerage accounts, business interests and today, digital assets. They are brought to present market value to create the “gross estate.” Liabilities are counted as debts, mortgages, assets, funeral and estate expenses, and any assets lawfully passing to a surviving spouse. The liabilities are deducted from the assets to get to the “net estate” value.
Federal limits to the estate tax deduction were doubled, and today very few estates in the US are subject to the federal estate tax. Here’s a comparison: in 2000, the federal estate tax exemption was $675,00 and an estimated 52,000 estates had to pay estate taxes. The top 10% of income earners paid almost 90% of the tax, with more than a quarter of that paid by the wealthiest 0.1%. Even those percentages have decreased since 2017.
When the new Tax Cut and Jobs Act became effective, the exclusion for federal estate tax increased from $5.49 million per person to $11.18 million per person. In 2019, there has been a further increase, to $11.4 million per person. That remains in effect until 2025.
Many states impose their own estate taxes. In New York State, the Basic Exclusion Amount for New York State Tax for estates for people who died on or after Jan. 1, 2019, and before Jan. 1, 2020, has increased from $5.49 million per person to $5.74 million per person. These amounts will increase in 2020 and will be adjusted for inflation in the future.
However, even without the federal estate tax, people still need estate plans to protect themselves and their families. A will ensures that your assets are distributed to the people you want to receive your assets. An estate plan includes Power of Attorney, to name the person you want to make financial decisions in the event you are incapacitated. You also want to have a Health Care Power of Attorney, so someone can make decisions about your health care, if you cannot speak on your own behalf. Talk with an estate planning attorney to make sure that your plan will work as intended to protect you and your family.
Reference: Rome Sentinel (Jan. 22, 2019) “2019 update: Should you be concerned about the estate tax?”