I really want to have to pay estate taxes. Sounds ridiculous right? Well let me put it another way: The Estate Tax Exemption is currently $5,430,000 per person. So between my wife and I we can pass on $10,860,000 to anyone we would like without having to pay any transfer taxes. Now, if we had $1.00 more than that and wanted to pass it along, then we would have to pay $0.40 on the dollar over the total exemption amount. Hence, I sure hope we will have to worry about Estate Taxes.
This $5,430,000 exemption was put into place at the beginning of this year. In fact, it is even indexed for inflation and will go up though the years. So how did we get here? In 2001 the Estate Tax Exemption was $675,000 with a Tax Rate of 55% over that amount. Through 2009 that Exemption Amount grew to $3,500,000. Then in 2011, it was repealed. In 2011 one could leave to their beneficiaries an unlimited amount of wealth without paying any Estate Taxes. Then again, technically they had to die in 2011. Not something we recommend to our clients.
From 2011 to 2012 it gets interesting … at least for estate planners and accountants. In 2011 the exemption dropped to $5,000,000, then rose to $5,120,000 in 2012. In 2013, it was set to drop back to $1,000,000. Confused yet? Please feel free to contact your Congressional Representative to ask for an explanation. However, before we got to 2013 something amazing happened. On December 32, 2012 (yes, technically January 1st 2013, but Congress decided that 2013 didn’t start in regard to the Estate Tax on that day), Congress made the $5,000,000 exemption permanent and indexed for inflation. So here we are at $5,430,000 per person. Mind you this Exemption amount does not apply to non-resident aliens. Their exclusion amount is $60,000, with tax on every additional dollar.
Now, most people think of the Estate Tax as the Transfer Tax. I want to transfer my money to my kids and the Government wants to tax me at death. Well, that is technically correct. However, there are two other Transfer Taxes. There is the Gift Tax, which covers transfers of over $14,000 to anyone during my lifetime up to $5,430,000. You can either transfer that amount when you are alive or when you pass away, but not both. Also, there is the Generation-Skipping Transfer (GST) Tax, which also has a $5,430,000 exemption. The GST is a tax imposed on the transfer of wealth to an unrelated person who is 37.5 years younger than the donor or if they are related, more than 1 generation younger than the donor, e.g. grandchildren. Simply, the government wants their pound of flesh (or 40% on the dollar) at each generation. For example, if my children did not need any of my wealth, and I decided to leave it to my grandchildren, then it would be taxed at 40% at my children’s level and again at 40% at my grandchildren’s level.
This is starting to get obscene, right? I agree, but the fact is that dead people don’t vote. Well maybe in Chicago, but this is estate planning in San Diego. Also, it’s a tax on the wealthy and an easy sell for most politicians in their districts. “It’s only a tax on Millionaires. Aren’t they supposed to pay their fair share?” Well never mind that those Millionaires have already paid Income Tax and often Capital Gains Tax on the money. Again, let me remind you that dead people don’t vote.
Let’s talk Portability. This means that if Husband dies, Wife can now use his unused Gift Tax or Estate Tax Exemption, even without using the standard A-B Trust that we know and love here in California. Notice, I left out GST Exemption. It wasn’t an oversight. Congress deliberately left out GST from Portability. Again, ask feel free to ask your Congressional Representative why.
So you may ask yourself: “Why would I need to do my basic California Estate Planning?” Well let me start by saying this: Anyone who has children, owns Real Property, or has over $150,000 in assets MUST do their Basic Estate Planning. Do you want the courts deciding who raises your children? Do you want your son or daughter inheriting any amount of wealth at 18? Frankly, I’ve never met a financially savvy 18 year old. If you’ve got less than $150,000, then your beneficiaries could do a Small Estate Exclusion and avoid Probate. If not, then your estate, even if it is just $150,001, will go through probate with huge fees, public knowledge, and significant delay. Let’s take a quick Real Estate Example. If someone has a $500,000 home and only $1.00 in equity in that home, the statutorily set attorney’s fees are $13,000. Yes, the attorney gets paid $13,000 on the Fair Market Value of the property, not on the net value. Double that if you have an executor being paid. So please, please don’t do this to your loved ones. Go see the best estate planning attorney that you can find and get a basic estate plan put in place. In the end, it will save you much more than it costs to put in place.