A new year is upon us. Another year is passing. So I thought it was a good time to write about death. Well, more specifically, the tax associated with death.
Most years, the federal government raises the applicable exemption amount against federal estate tax. Recently, I wrote about federal gift tax, and the premise of my article was that for all intents and purposes, there is no gift tax, because an individual would have to give away at least $5,450,000 in the new year before he would ever pay gift tax. (The receipt of a gift is never taxable.)
Many people still come to my office asking about gift tax. For some reason, many (many) people believe that they will be subject to gift tax if they give away some amount (and the amount varies from person-to-person) of money, but no one has ever met a person who actually ever paid gift tax.
I have to say that the number of people who ask me about federal estate tax has dropped off quite a bit. I assume that is because people have received the message about federal estate tax. That message, much like my message about federal gift tax, is that very few people will ever pay federal estate tax. (By the way, as I mentioned in last week’s article, the state of New Jersey does not impose a gift tax, so there is only federal gift tax for New Jersey residents.)
In 2015, the applicable exemption equivalent against federal estate tax is $5,430,000. What that means is, a person can die with any amount less than $5,430,000 and his estate will not have to pay federal estate tax. The value of the estate includes all assets that the decedent owned—his house, 401(k), IRA, brokerage accounts, and the death benefit of any life insurance policies that he may have owned.
Obviously, the vast majority of us do not have an estate worth more than $5,430,000. So, the vast majority of us will never have to pay federal estate tax. As with the federal gift tax, it is fairly safe to say (for most people) that from a practical standpoint, there is no federal estate tax. Stop worrying.
And if $5,430,000 was enough to shelter the entirety of your estate from federal estate tax, if you are married, you and your spouse can easily shelter $10,860,000, or twice the value of the applicable exemption equivalent. In other words, $5,430,000 times 2. That’s because both you and your spouse receive an exemption equivalent of $5,430,000; accordingly, both you and your spouse can shelter that amount of assets.
Congress has made it exceedingly easy for a married couple to shelter both spouses exemption equivalent. When the first spouse dies, the surviving spouse (whom I assume is the executor of the deceased spouse’s estate) merely has to make an election on a properly filed federal estate tax return to use the deceased spouse’s unused exemption equivalent. Stated otherwise, the surviving spouse simply checks a box saying, when I die, please apply my spouse’s exemption equivalent against my estate, along with my exemption equivalent.
From a practical standpoint, this means when the second-to-die spouse does die, his executor can shelter $10,860,000 from federal estate tax. If you are a married couple and unless you have more than $10,860,000, then you do not have to worry about federal estate tax. If you are single person, you only have to worry about federal estate tax if you are worth more than $5,430,000.
Since people who are worth more than those amounts are part of the now-infamous 1%, the other 99% of us do not have to worry about federal estate. For this reason, I say that from a practical standpoint there is no federal estate tax.
And if all of that weren’t enough for you, in 2016, the applicable exemption equivalent is rising from $5,430,000 to $5,450,000. A married couple will effectively be able to shelter $10,900,000.
Federal estate tax is often one of the biggest concerns people bring to estate planning, yet it affects very few families. Understanding how the federal exemption works can help separate fact from fiction and allow you to focus on the estate planning issues that are more likely to affect your family.