How Much are Estate Taxes? Currently, most estates are not subject to estate taxes. Unless the property that a person owned when he passed away was worth more than $5.49 million (for 2017), no estate taxes apply. The entire estate is considered exempt from estate taxes if it is below that total value. If the property was worth more than $5.49 million, the tax rate only applies to the portion that is over that exempt amount and the tax rate on those assets starts at 40% and goes up from there depending on the size of the estate. Also note that Congress has indexed the exempt amount to inflation and made it “permanent” (meaning, until Congress changes its mind, again).
The truth at this point is that the vast majority of persons will not be subject to estate taxes when they pass away.
But what can be done to reduce or eliminate estate taxes for persons who do have assets in excess of $5.49 Million? The current law has been crafted to make it difficult to avoid paying estate taxes. But one significant method of relief is available to married couples who elect to establish a Family Trust or Family Trust. This relief comes from the fact that the exemption stated, above ($5.49 million) is available to each spouse. So a married couple can protect twice that amount, once for the husband and once for the wife.
With a properly prepared Family Trust, those two exemptions can be preserved so that, when the estate ultimately passes to the next generation, up to $10.98 million can pass tax free.
Subject to the “portability” discussion, below, a Simple Will cannot accomplish this. When a spouse passes away and simply leaves everything to his or her surviving spouse, the normal exemption applies to that estate. But now the surviving spouse owns twice as much — both his or her half plus the deceased spouse’s half. And when the surviving spouse later passes away, the estate will typically be twice the size since it now includes both his half and her half. Depending upon the size of the estate, that could result in dramatically higher taxes than would have been imposed had the couple set up a Family Trust or a Family Trust.
Because of this danger — plus the unnecessary costs and delays associated with probate — most married couples with a substantial net worth will opt to utilize a Family Trust or a Family Trust to avoid probate altogether and to reduce or eliminate the risk of estate taxes, as well. A definite win-win situation for most married couples.
What is “Portability?” A concept called “portability” was also added by changes to the law adopted in 2010. Greatly simplified, it allows one spouse to take advantage of the other spouse’s unused estate tax exemption. Here’s how that might work:
- Assume a married couple has total assets of $10 million of which $2 million are the husband’s and $8 million are the wife’s.
- If the husband passes away first, his $2 million in assets are fully exempt because they are less than the $5.49 million exemption.
- When the wife later passes away, without “portability,” her $8 million in assets would be subject to an exemption of $5.49 million. But the remaining $2.51 million in assets would be taxed at a 40% rate, resulting in taxes of about $1 million.
- But under the new “portability” concept, the unused $3.49 million of the husband’s exemption is “portable” to the wife so that she now has a total available exemption of $8.98 million (her own $5.49 million exemption plus her husband’s unused exemption of $3.49 million).
- As a result, when the wife passes away, instead of paying over a million dollars of taxes, this portability protects the heirs entirely so no taxes are due.
- But note that the portability must be claimed by the surviving spouse no later than 9 months after the death of the first spouse.
While this arrangement can help in the situation outlined, above, it is not as flexible as the options available in a Family Trust. For example, in the foregoing illustration, if the wife had passed away first leaving her $8 million directly to her children, there would have been taxes of about $1 million due on the part of her estate that exceeded the exempt amount. Since her estate exceeded the exempt amount, there would have been no unused portion of her exemption that would have been portable to her husband.
Because of this limitation, the use of a Family Trust with appropriate provisions is the better solution to the problem.