The expiration of key laws in Congress may mean your estate is at risk of owing 35-55% in “Death Taxes” after your passing.  Learn how to protect your estate from the IRS and steps to take to “opt-out” of the government’s plan for your money.

By: Darlynn Morgan, Orange County Estate Tax Attorney

Key legislation is set to expire at the end of this year that may put your estate at risk for up to 55% in “death taxes” after your passing.

Preparing for this change now is critical for high-net worth individuals, but also for middle-class families, too.  Here’s why:

  • If congress fails to act, the estate tax will revert from a $5 million dollar exemption to $1 million on December 31st.  That means that if your estate is worth over $1 million at your passing, your family may be on the hook for taxes between 35-55%.
  • For many people, when you add up the value of your home, life insurance policies, investments and assets, $1 million is usually closer than you think.
  • The payment is due in cash just 9 months after you die (or the 2nd spouse dies if you are married), often forcing loved ones to sell assets quickly at depressed market or “fire sale” prices to satisfy the bill.
  • There’s a very real chance that up to half of the inheritance you worked so hard to leave your family will go to Uncle Sam.

The good news is that the estate or “death tax” is entirely voluntary and there are steps you can take right now to minimize your exposure.

One such strategy is to utilize the lifetime gift tax exemption, which also set to expire at the end of the year.  This law allows you to remove up to $5.12 million (or $10 million for married couples) out of your “taxable estate” by gifting it now to future generations. On December 31st at midnight, the exemption amount significantly drops to $1 million.

In other words, for the rest of this year, parents can pass along valuable assets to their heirs up $5.12 million dollars (i.e. a house, stock portfolio, part of the family business), without paying a single dime to Uncle Sam.

You won’t necessarily have to give up control and sacrifice your financial security by utilizing this exemption, either. Your estate planning attorney can help you meet these gifting requirements in such a way that gives you continued access to your assets and income when you need it.

Tools such as living trusts can also be used to shield your estate from burdensome taxes after your passing. Your estate planning attorney will advise you on the best strategies to implement based on your wishes and financial needs.

Why Does This Matter Now?

You may be thinking that there is plenty of time to put a plan in place to protect your family and your estate before the end of the year.  You might also be hoping that Congress will step in and make these temporary exemptions and tax breaks permanent.

While the future of the estate and gift tax is unclear, even if Congress does come to an agreement, the likelihood of continuing on with such a significant tax break is slim.  The President recently asked Congress to reduce the gift tax exemption to $1 million, with many politicians on both sides of the isle supporting it due to the nature of the economy.  So for your family’s sake, it’s a good idea to talk to your attorney before placing your estate in the hands of a politician.

On the issue of timing, proper estate tax planning requires getting appraisals, amending titles and creating airtight documents.  As you can imagine, this process can take months. Our law firm is already busy handling year-end estate tax planning, so don’t wait until the last minute to get professional help.

Is Estate Tax Planning Right For You?

To find out if additional planning would help to shield your family from unnecessary taxes after your passing due to change to the federal estate tax laws, give our Newport Beach estate planning law firm a call at (949) 260-1400 and ask to schedule a Family Wealth Planning Session at no charge during the month of July.