For a long time, avoiding the federal estate tax was a big concern; however, given that the threshold for the federal estate tax is currently very high, the likelihood of most of us ever being liable for federal estate tax is quite low. This, of course, does not mean that estate planning isn’t beneficial. Estate planning is still a great way to avoid probate, and to have your affairs in order and organized.
What is the current tax rate?
In 2019, the current federal estate tax is 40%. This is quite high; however, so is the exemption. The current exemption is $11,400,000. Thus, is a person passes in the year 2019, s/he receives a tax “coupon” of $11,400,000.
This amount is subject to annual change. The Tax Act, which sets forth the gift and estate tax rate, and exemption, is subject to sunset January 1, 2026. As of 2026, the exemption reverting back to $5,000,000 unless further action is taken by Congress. There is much debate about whether Congress will take any other action. Time will tell.
What is the gross estate?
The gross estate includes all real and personal property in which the decedent had an interest. It also includes things such as annuities, the value of the decedent’s share of a joint estate, and life insurance proceeds (even though payable directly to the beneficiaries).
What is the adjusted gross estate?
After the value of the estate’s gross estate is determined, its value is adjusted for deductions such as funeral expenses, and expenses incurred in the administration of the estate.
The federal exemption or “coupon” of $11,400,000 is then applied. So, for most of us, our taxable gross estate will be 0.
Despite this, estate planning is an important tool for a lot of other reasons such as avoiding probate, ensuring your assets go where you would like them to, and ease the burden for loved ones.
Let me know if I can assist you in any aspect of your estate planning. I am happy to schedule a complimentary 15 minute consultation with you.