“Nothing is certain,” it’s said, other than “death and taxes.” While that may be so, it’s less clear how the near future will treat the nature of the taxes upon one’s death. The so-called “death tax” is the tax that must be paid by a decedent’s estate for privilege of passing the property he held at death on to one’s heirs. More exactly, as 26 USC 2033 reads:
“The value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.”
In very general terms, if a decedent owned it at death, it’s part of his or her gross estate. Absent an exclusion amount, it will currently be taxed at 35%.
Thankfully, most taxpayers have an estate that is smaller than the “exclusion amount” — the amount that is excluded from being taxed on death. Presently, that amount is 5.12 million, as adjusted for inflation. This means that one dying with assets valued at less than that are not required to pay estate tax.
However, unless Congress agrees to change the existing law within the next year, the exclusion amount will drop from 5.12 million to 1 million. Consequently, many more Americans could be become subject to an estate tax liability. For those in southern California, where the fair market value of one’s home starts at around $400K and rapidly moves upwards, half or more of their exclusion amount will be used up just trying to pass the house to the kids.
The current uncertainty in the estate tax arena surrounds Congress’ perceived unpredictability. It’s not known whether it will extend the 5 million exclusion amount, decrease it or, as some recent candidates have mentioned, repeal the entire estate tax. This is a class warfare issue and many republicans and democrats have polar opposite views in this area.
There are a multitude of lawful strategies for avoiding or minimizing estate taxes, however, and that’s something our office may be able to help with.