Perhaps unwittingly, President Benjamin Franklin best distilled the reason for estate planning when he said, “[N]othing can be said to be certain, except for death and taxes.” The estate tax exemption is a keen example of how these certainties collide.
Generally, one might think of death and tax as separate: one being after life and the other during. Certainly, estate planning can relate to each individually. At death, you specify who receives what and when. During life, you set up a charitable trust to optimize your tax position or irrevocable trust to provide for your children in a lower tax bracket.
However, when planning your estate, you should realize these two players can go hand in hand. Unsurprisingly, tax can be the unwanted gift that keeps on giving, even after death. Fortunately for your beneficiaries, the government offers a partial reprieve from this less than desirable package.
Also known as the “Death Tax,” estate tax affords the government nearly half of your estate upon death. Currently, the estate tax rate is 40 percent. Without an exemption, this tax can toll a hefty sum for the average taxpayer. The estate tax exemption protects a portion of the estate from this 40 percent tax.
Under the Tax Cuts and Jobs Act of 2017, the legislature expanded the exemption from $5.49 Million in tax year 2017 to $11.18 Million in tax year 2018. For 2019, the exemption increased yet again to $11.4 Million. Today, a married couple benefits from an exemption worth $22.8 Million. This estate tax exemption effectively protects the average taxpayer.
In all, the “Death Tax” appears to target the ultra-wealthy. However, do not be deceived. Even the average taxpayer can incur costs in the form of probate. In some states, such as California, probate is an expensive process but can be averted if you place your assets in a trust. Moreover a taxpayer who is on the cusp of the exemption may benefit from strategically gifting during her lifetime.
Whether preparing for death, taxes, or both, be proactive and speak with an expert who can help guide you through the ups and downs of estate planning. Our team is ready and willing to help. After discussing your specific situation and goals, we can sit down and craft an estate plan tailored to your individual needs. Whatever your individual scenario, take time to prepare for the certainties that President Franklin once so aptly identified.
The author of this post, Star Q. Lopez, is a partner of Layton & Lopez Tax Attorneys, LLP. Ms. Lopez focuses on tax, business, and estate planning issues. She holds a JD from UCLA School of Law, a LLM in Taxation from NYU Law, and a MBA from The University of Chicago Booth.