Berge & Berge, LLP Blog

Thursday, April 5, 2018

Five Facts You Should Know About the Federal Estate Tax

Californians do not need to worry about estate taxes because the state ceased imposing estate taxes as of January 1, 2005. However, your estate could still owe federal estate tax. Our California estate tax attorneys help clients develop an estate plan that reduces or eliminates estate tax to protect your property for your loved ones.

When you meet with our estate tax planning lawyers, we review your entire financial situation to determine the best strategies to meet your needs and accomplish your goals. During our meeting, we discuss ways to reduce federal estate taxes. However, we believe there are five important things about federal estate taxes that you should understand now.

Fact Number 1: Your estate may not owe federal estate taxes

Very few estates owe federal estate taxes. In 2018, the basic exclusion for estates to be taxed increases to $10,000,000. This amount is before the inflation adjustment that has not been released yet by the Internal Revenue Service. The Tax Policy Center estimates that of the 11,300 estate tax returns filed for individuals who died in 2013, only 4,700 of those estates were taxable. Therefore, your estate probably will not owe federal estate taxes, but it is still prudent to consult an experienced California estate planning attorney to ensure you take all steps needed to avoid estate taxes.

Fact Number 2: Estate Planning Can Reduce or Eliminate Estate Taxes

For estates that might be subject to federal estate taxes, comprehensive estate planning can reduce or eliminate federal estate taxes. There are several estate planning tools, including trusts, that can be used to reduce the value of the estate which reduces the federal taxes owed by the estate.

Fact Number 3: Estate Tax Exemptions Revert to 2017 Rates in 2026

According to The Tax Cuts and Jobs Act (TCJA), the estate tax exemption, which is expected to be $11.2 million ($20.4 million for married couples) when the IRS releases the final figures for 2018, will revert to 2017 amounts on January 1, 2026. The amounts will be adjusted for inflation; however, this could be a significant obstacle for individuals who have not engaged in estate planning to prepare for the change in 2026.

Fact Number 4: You need to take all deductions to lower the amount of the taxable estate.

When calculating the taxable estate, you must begin by calculating the gross estate value. The gross estate value is computed by using the fair market value of all property and interests of the decedent as of the date of death. However, the gross estate value is not the value used for calculating federal estate taxes.  You can deduct certain amounts from the gross estate value to arrive at your taxable estate value.

Examples of deductions include mortgages, property that passes to a surviving spouse, estate administration expenses, and property passing to qualified charities. Working with a California estate attorney can ensure that all allowable amounts are deducted from the gross estate value to decrease the taxable estate value as much as possible.

Fact Number 5: Married individuals have up to double the individual exemption amount to use to avoid federal estate taxes.

Under the current federal estate tax law, spouses can combine tax exemptions to have up to $20 million (expected to be $20.4 million for 2018) in exemptions before owing federal estate taxes. The “portability” feature allows a surviving spouse to use any unused estate tax exemption of a pre-deceased spouse. In other words, if your spouse passes away and only requires $2 million in exemptions, you can use the remaining personal exemption to reduce the taxable value of your estate.

Consulting a California Estate Planning Attorney

Even though your estate may not be subject to federal estate taxes, you need to consult an estate-planning lawyer. You want to ensure you have the documents in place to protect your family and ensure your desires are carried out after your death. Schedule a consult with the Law Offices of Berge & Berge today.

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