Our nation’s estate tax celebrates the hundred year mark in 2015. The often controversial estate tax stands to gain even more attention as the 2016 Presidential election draws near.
The estate tax has been central to many debates during past Presidential elections. Republicans continue to call for the abolition of the estate tax, while Democrats ask that it be strengthened.
The two sides could not be further apart on the issue.
Owning a fractional interest in a piece of highly valued art has never been a simple matter where estate taxes are concerned. How the IRS values and applies the estate tax for estates that include fractional interests in art may be changing due to a recent Fifth Circuit Court of Appeals ruling.
Owning a world-class art collection is something most of us only dream of. For wealthy families and individuals, art collections are a valuable and treasured part of their family’s history. But when the owners pass away, these collections often trigger huge estate taxes. Because they are not liquid assets, heirs must use funds to pay the estate taxes from somewhere else in the estate or sell the art to pay for the taxes.
To complicate matters, valuable pieces of art that have been passed down for generations are often owned by multiple family members, with each owning a fractional interest in the art. This makes it even more difficult to handle estate tax issues.
Estate taxes are seen by some as instruments of public policy, an attempt to fight economic inequality by diminishing the ability of wealthy families to aggregate vast amounts of wealth. Others see estate taxes as a “death tax” that penalizes those who are financially successful. Whatever your opinion, estate tax rates are still quite high compared to other taxes. This creates an incentive to plan in advance and use sophisticated methods to reduce estates taxes.
Thirteen different brackets might make you think that estate tax planning is all about college basketball! According to a Fox Business article, “2015 Estate Tax Rates: How Much Will You Pay?” the rate structure for the estate tax has remained virtually unchanged since 2013, even with these numerous brackets. See the chart below for a birds-eye-view of the 13 different brackets:
|
Amount of Taxable Estate |
Tax Bracket |
|
$0-$10,000 |
18% |
|
$10,001-$20,000 |
20% |
|
$20,001-$40,000 |
22% |
|
$40,001-$60,000 |
24% |
|
$60,001-$80,000 |
26% |
|
$80,001-$100,000 |
28% |
|
$100,001-$150,000 |
30% |
|
$150,001-$250,000 |
32% |
|
$250,001-$500,000 |
34% |
|
$500,001-$750,000 |
37% |
|
$750,001-$1 million |
39% |
|
Over $1 million |
40% |
Source: IRS
Before you do any number crunching, remember that the federal government has an estate tax exemption for all estates more than $5.43 million (in 2015). The “lifetime exemption amount” is the cut-off mark for how much wealth each person can pass to their heirs without owing any estate tax.
The article explains that the exemption is different than a standard deduction. What you do is look at all your taxable estate assets and knock out the first $5.43 million. If you have more than that, the estate tax will be at the maximum rate of 40 percent on the portion of the estate that’s above the $5.43 million threshold. For instance, if your estate is $5.44 million, then your estate's tax liability would be $4,000 — which is 40 percent of the $10,000 above the $5.43 million threshold.
An estate planning attorney can help you with some ways to reduce or even eliminate your estate tax liability. This can include gifts during your lifetime to reduce your estate assets at your death. The law says that you can give an individual up to $14,000 annually without having to pay any gift tax. If you give more than that amount, you'll start using up your lifetime exemption. You don’t want that!
There are also many more-complicated methods of giving money to potential heirs during your lifetime that can reduce your eventual estate tax bill. Talk with your estate planning attorney about these more complex strategies and leave more money for your heirs and less for taxes.
Reference: Fox Business (July 16, 2015) “2015 Estate Tax Rates: How Much Will You Pay?”
The Internal Revenue Service has won a settlement of $388 million from the estate of Detroit Pistons owner Bill Davidson. According to the IRS, the estate owned more than $2 billion in additional taxes. To gain some perspective: in 2013, the US Treasury took in a total of $12.7 billion in estate tax revenue. Davidson, who made his fortune in glass and auto products, was best known to the public as the team owner of the Pistons, the W.N.B.A.'s Detroit Shock and the N.H.L. Tampa Bay Lightning.
In an article that appeared in Forbes, "IRS Grabs $388 Million From Billionaire Davidson Estate," the case against Davidson's estate is explained in detail. Two years ago, Davidson's estate filed a matter with the U.S. tax court that challenged the agency's assessment of additional taxes. They claimed that the estate owed $187 million in gift taxes, $152 million in estate taxes, and $49 million in generation-skipping taxes, plus a $133,000 gift tax penalty bill.
Two problems factored into to these deficiencies. The IRS claims that the Davidson estate undervalued some corporate stock and improperly valued the self-cancelling installment notes (SCINs). The IRS said that the estate also underestimated the value of privately held stock held in trust for Davidson's children and grandchildren.
Some high-net worth families still face the challenge of reducing their estate to minimize or eliminate estate taxes, although the federal estate tax exclusion is currently larger than it has ever been. The portability of unused exclusion amounts are at $5.43 million for individuals and $10.86 million for couples. But a 40 percent top estate tax rate on amounts above the exemption concerns those with large estates.
High-net worth individuals managing their estates are better off working with an experienced estate planning attorney, The Marietta Daily Journal confirms in a recent article, titled “Estate reduction ensuring wealth transfer to heirs.” With the changes in estate and gift tax laws, have an expert on your side to ensure your documentation is drafted properly and work with your financial advisor to plan asset transfers to heirs.
An easy move for wealthy families is gifting. Individuals can gift up to $14,000 per year, per individual without incurring a gift tax. The amount doubles for spouses. There’s an informational gift tax return to be filed, but there’s no tax due if the gift is under the annual exclusion limit.
Most of us don’t want to just enjoy our retirement and have enough money for old age, but to leave something behind as well. But what's the best way to do that? Should you leave an inheritance, or give your money away while you're still around?
Let’s take a look at the tax implications of both scenarios.
A recent MarketWatch article, titled “Why it’s better to give than to bequeath,”reminds us that with both gifts and inheritances, it’s the person giving the money who pays the tax. So, for example, if you give a gift or an inheritance to your children, they don’t pay taxes—it will be your estate that has the tax liability and must pay. However, there are huge tax differences between gifts and inheritances. The gift tax is exclusive: it’s on top of the gift.
Sixteen states and the District of Columbia levy an estate tax with some taking a bigger piece of your estate than others. For this reason, it is critical to understand which states are going to take more out of your beneficiaries pocket when you die. So which states are the most costly?
Does your state have a death tax? While the federal applicable exclusion is $5.43 million in 2015 or $10.86 million for a married couple, many states have much lower thresholds. This casts a much wider net—meaning there’s a better chance that your estate will be subject to state tax.
An article in The Times of Trentontitled, “N.J. ranks among worst states to die from an estate tax perspective,” points out that some states don’t index their exemption amount for inflation, which gradually increases the number of taxpayers affected.
The House voted last week to repeal the estate tax, a longtime priority of Republicans that also spurred Democratic charges that the GOP is in the pockets of the rich. The 240-179 vote broke down largely on partisan lines, with seven Democrats voting to repeal the estate tax and three Republicans voting against it.
Senator John Thune (R-SD) introduced legislation to repeal the estate tax, but it’s uncertain when or if that proposal might get a vote. There were 54 senators who supported the estate tax repeal last month in a non-binding budget resolution vote. Nonetheless, this is six votes short of the 60 needed.
The Hill’s article, titled“House votes to repeal estate tax,” notes that a repeal of the estate tax would increase the deficit by $269 billion over the next 10 years, and the Joint Committee on Taxation projects that the estate tax will impact 5,400 estates in 2015. This is approximately 0.2% of the 2.6 million deaths expected in the U.S. this year.
In 2015, only estates worth more than $5.43 million per individual would owe federal estate taxes if the estate owner dies this year. That's up from last year's $5.34 million estate tax exemption. (In addition, the federal lifetime gift tax exemption also rises to $5.43 million in 2015.)
2015 brings new changes to the estate tax exemption. Experts agree that this change (and others) means that a fresh look at estate planning and asset protection should be top priorities for individuals planning for retirement or who are already retired.
The Investor's Business Daily says this could be good news in its article“Estate Planning For 2015: How To Protect Assets From Taxes” as it could possibly create better asset protection. However, the article also warns of the complexity of these changes, and that you should consult an experienced estate planning attorney to ensure that your particular circumstances are addressed.
Here are four rules you need to know about the estate tax for 2015.
The estate tax exclusion is now $5.43 million. The federal estate tax applies only to those whose taxable estates exceed a certain amount. The U.S. has a unified gift and estate tax system, so if you make taxable gifts during your lifetime you'll use up some of this $5.43 million in advance. In addition, you will need to file a gift tax return even though you won't have to “pay” a gift tax at the time you make the gift.
The annual gift tax exclusion is still $14,000. This an annual exclusion makes most gifts nontaxable, so you can give up to $14,000 in cash or property to anyone again this year.
Houston Estate Planning and Elder Law Attorney Blog