In the past, the federal estate tax was levied on estates over $600,000. Therefore, sophisticated trusts were required to preserve the full $1.2 Million exempt amount for married couples.
In 2013, Congress made the exempt amount $5 Million per person, as adjusted for inflation. Therefore, for 2016, each of us gets to give away up to $5.45 Million before any tax is imposed. There are no sunset provisions for this law any longer and it will continue to adjust upward as the rate of inflation increases it.
Additionally, the current law allows for spouses to combine their estate tax exemptions without the need for complex trust language in separate trusts. When the first spouse dies, his or her estate only uses up that portion of the exemption necessary to cover the assets being given away. When the second spouse dies, he or she not only has the benefit of the individual exempt amount, but can use the portion of the deceased spouses exemption not already used. Therefore, if a couple died in 2016, no federal estate tax would be imposed until the estate exceeded $10.9 Million.
This use of the deceased spouse’s exempt amount is called “portability”. In order to preserve the unused portion of the first spouse’s exemption, an estate tax return must be prepared event though no tax will be due.
While any law can change, it is unlikely that Congress will try to change this law in the near future. While $5.45 Million is a generous amount, changing this amount downward would not simply affect the wealthy. Without a generous exempt amount, small family owned businesses and family farms would be affected. In the past, it was not unusual to see family businesses and farms sold because the family inheriting the business could not afford to pay the estate tax. It is unlikely that Congress would return to that system as it would thwart
entrepreneurship, the small business and farming.
While high asset families should keep abreast of any changes in the federal gift and estate tax law, it should not be an issue to worry about.