The present federal estate tax rates and levels are set to expire at the end of this year. Under current rules, only estates that have a total value of $5.2 million have any obligation, paying a top 35% tax rate on any assets over that amount. If Congress allows the current plan to expire, at the start of the year the exemption level will drop to $1 million at a top tax rate of 55%
There is a false assumption among some that this tax is only a concern for the super-rich. While middle and lower income families do not have to worry about the change, you may be surprised to learn that a lot of families may actually be affected by the reversion of this tax cut down to the $1 million mark. That is because for the purposes of this tax, the IRS Takes in all the value of an estate into account, including real property, life insurance, and business ownership, among other things. When all of that is added up, more people may fit into this group than is realized.
These are assets accumulated over a lifetime of hard work and sacrifice and no one wants to see them dispersed to the IRS. It is reasonable for these families to be concerned about their possible tax bill and plan accordingly.
As helpfully summarized in a report in the Wall Street Journal earlier this week, if the law is not extended and reverts back to 2002 rates, it may be unlikely that large estate will see such a favorable tax environment.
Many argue that based on the economic climate of the moment, it is unlikely that Congress will be able to act to continue this tax exemption. Whoever controls the White House and which party controls the U.S. Senate and House of Representatives will surely have an influence over the future inheritance tax situation. But no matter who wins there may be significant changes in the future.
There is a slight chance that some compromise might be reached before the end of the year. That compromise would probably be an exemption level in the middle (perhaps $3.5 million) and a middle rate (35%-40%). Nevertheless, it would still involve significant financial changes for millions of Americans facing a personal loss and a financial burden of having to deal with such tax issues while also making sure that the bereaved families are financially provided for.
In any event, the clear takeaway for the current uncertainty is a reminder that now is the time to consult with an estate planning lawyer, as these may be the last few months that we may see such a large exemption in tax law. If you are in the San Diego area, consider getting in touch with the legal professionals at the Law Office of Scott Soady to see how we can help.