The Federal Estate Tax
“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”
-Benjamin Franklin, 1789
As the saying goes, “death and taxes” are some of the few certainties in this life. In the case of the federal estate tax, the rate is high: 40%. This means you may be leaving your not-so-favorite Uncle Sam a big portion of your estate. However, under current law, the majority of Americans will not pay the federal estate tax. The federal estate tax can be minimized, or perhaps even eliminated, if you leave your estate to your spouse, if you leave your estate to charity, or if you use your federal estate tax exemption amount.
First, the marital deduction allows an individual to leave assets to a surviving spouse free of the federal estate tax. Mechanically, you receive a deduction equal to the amount of assets passing to your surviving spouse. However, when your surviving spouse later dies, the assets are taxed in his or her estate, unless he or she has remarried and leaves everything to a new spouse.
Second, the unlimited charitable deduction allows an individual to leave assets to a qualified charity free of the federal estate tax. Similar to the marital deduction, you receive a deduction equal to the amount of assets passing to the charity.
If you want to leave a portion of your estate to someone other than your spouse or a charity, then you may use your exemption amount to shelter a portion of your estate from the federal estate tax. An individual who passes away in 2016 is permitted to pass $5.45 million of wealth before paying the 40% federal estate tax, as long as he or she hasn’t previously used a portion of that exemption amount for lifetime gifts. If your estate is worth more than the exemption amount, other tax planning methods are available to minimize your federal estate tax bill and maximize the amount you leave to your legatees.
As you can see, the federal estate tax may not be a certainty at your death. You should engage a tax professional to navigate the rules and put a proper plan in place.
ABOUT THE AUTHOR – LISA M. LEHAN
I am a shareholder of Koley Jessen P.C., L.L.O., located in One Pacific Place. My practice is focused on estate and tax planning. Outside of the office, I enjoy spending time with my husband and our three children. For help with your family’s estate planning needs, please contact me directly at 402.343.3881.