As you go through life providing for your family, you may see a comprehensive picture. Your success can build on itself, and as you get older, you may recognize the fact that you are going to be in a position to leave behind a significant legacy for your loved ones to draw from after you are gone.
This is a rewarding position to find yourself in as a senior citizen, but you do have to be aware of the potential impact of estate taxes. There are some misconceptions that people often harbor about taxes, and in this blog post, we will look at four myths that people often buy into.
1.) Every estate is subject to the federal estate tax.
When you hear about the existence of estate taxes, you may automatically assume that your estate will be reduced through the imposition of these taxes after you are gone. This may be the case, but in fact, most estates are not subject to taxation.
This is because there is a federal estate tax credit or exclusion that allows you to transfer a certain amount tax-free before the estate tax would be applied on the remainder. A $5 million exclusion was established for the 2011 calendar year, and this figure has been retained, but there have been inflation adjustments year-by-year. At the time of this writing in 2016, the estate tax exclusion stands at $5.45 million.
The maximum rate of the federal estate tax is 40 percent.
2.) The federal estate tax is potentially applicable on transfers to anyone, even close relatives.
The idea that no relative is exempt from the federal estate tax is not entirely true. There is an unlimited marital deduction. You can use this deduction to transfer any amount of money and property to your spouse free of the death tax.
A caveat to the above statement is that the unlimited marital deduction is only available to American citizens.
Due to a relatively recent Supreme Court ruling, this marital deduction is available to all legally married couples, regardless of sexual orientation.
We should point out the fact that leaving everything to your spouse tax-free is not necessarily a comprehensive estate planning solution, because your spouse would then be in possession of an estate that could potentially be taxed.
3.) Even if I am married, my estate tax exclusion dies when I do.
The estate tax exclusion is afforded to each individual taxpayer. As a result, if you are married, you have an exclusion, and your spouse has his or her own exclusion. Many people assume that your exclusion would no longer exist after you die. The idea is that a surviving spouse would have just one exclusion to utilize after the death of his or her spouse.
This is the matter of portability in legal parlance. Prior to the 2011 calendar year, this assumption was correct. The estate tax exclusion was not portable, so the surviving spouse did have just one exclusion.
Many people thought this was unfair, because in most cases, the family wealth was accumulated by two different people.
At the end of 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was passed. Provisions contained within this measure made the exclusion portable between spouses. Now, a surviving spouse can use the exclusion that was afforded to his or her deceased spouse. Using the exclusion that is in place for 2016, a surviving spouse would have an exclusion of $10.9 million.
5.) If my estate is valued at less than $5.45 million, I’m in the clear when it comes to death taxes.
The federal estate tax is not the only death tax that can be a factor for you. There are 14 states in the union that have state-level estate taxes, and there is also a separate estate tax in the District of Columbia. Our practice is in Hartford, Connecticut, and we do in fact have a state-level estate tax in our state.
It is quite possible to be exposed to the Connecticut state estate tax even if you are exempt on the federal level, because the state-level exclusion is lower than the federal exclusion. The Connecticut state estate tax exclusion is $2 million.
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Estate taxes can have a significant negative impact on the financial future of your family. The good news is that there are numerous different things that you can do to reduce your exposure.
If you would like to discuss estate tax efficiency strategies with a licensed estate planning attorney, our doors are open. To set up a consultation, call us at 860-548-1000 or send us a message through our contact page.
Mr. Horowitz was awarded his Juris Doctor degree with honors from the University of Connecticut School of Law. While attending law school, Mr. Horowitz received the American Jurisprudence Award in Legal Ethics and the Nathan Burkan Award.
After graduation from law school, Mr. Horowitz continued his legal education at New York University School of Law where he received a Post Doctorate Law Degree in Taxation. He has also recently received a national achievement award.
Mr. Horowitz is admitted to practice before all the state courts in the State of Connecticut and the United States District Court.
Mr. Horowitz was selected for Super Lawyers in 2021.
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