There has been a bull market in the real estate realm for a number of years now, and home values are really skyrocketing in some areas. Investors and individual homeowners are enjoying the halcyon days, but some people face a looming threat that we will explain in this post.
Federal Estate Tax
We have a federal estate tax in the United States, and it carries a robust 40 percent maximum rate. The credit or exclusion is a dollar figure that you can transfer before the estate tax would potentially be applied on the remainder.
In 2017, it was $5.49 million, and the exclusion had been $5 million indexed for inflation since 2011. This changed when the Tax Cuts and Jobs Act was enacted in December of 2017. It boosted the exclusion to $11.18 million, and there have been inflation adjustments since then.
At the time of this writing in 2021, the exclusion is $11.7 million. If you are thinking you can give gifts to avoid the tax, we have some bad news to pass along. A gift tax has been in place since 1932, and the gift tax and the estate tax are unified under the tax code.
The $11.7 million exclusion that we have this year applies to large gifts that you give during your life along with the estate that will be transferred after you are gone.
There is an exception to the rule when it comes to transfers between married couples. As long as you are married to an American citizen, there is no taxation on inheritances that you leave to your spouse, regardless of the amount of property that is being transferred.
The estate tax exclusion is portable for married couples, so a surviving spouse would be able to use the exclusion that was earmarked for their deceased spouse.
Your estate’s value includes the value of all real property that you own, so the housing boom could have an impact from an estate planning perspective. Plus, there is something you should understand about the estate tax exclusion.
It is going to sunset or expire on January 1, 2026. At that time, it will revert back to the $5.49 million that was in place in 2017.
For the 99.5 Percent Act
The estate tax exclusion could actually go down to $3.5 million long before 2026. Senator Bernie Sanders of Vermont has introduced the For the 99.5 Percent Act, and it includes a reduction in the exclusion to this level.
It would also raise the rate. As we have stated, right now the top rate is 40 percent, and the provision in this measure would raise it to 45 percent for the first $10 million. It would go up to 50 percent for estates valued at more than $10 million, and it would steadily rise from there.
Billionaires would be hit with a 65 percent estate tax rate if this bill is enacted, but of course, there will be considerable resistance from the Republican side of the aisle.
State-Level Estate Taxes
There is yet another dimension to consider when you are evaluating potential estate tax exposure. Twelve states in the union have state-level estate taxes, and there is a separate tax in Washington D.C. Fortunately for us, there is no Michigan state estate tax.
However, this does not necessarily mean that you are out of the woods as a Michigan resident. If you own property in a state that has an estate tax, and its value exceeds the exclusion in that state, it would apply to your estate.
The state-level exclusions are considerably lower than the federal exclusion. For example, the exclusions in Massachusetts and Oregon are just $1 million, so you should do some research if you own valuable property in another state.
We Are Here to Help!
There are steps that you can take to mitigate your exposure if the estate tax are going to be a source of concern for you. This being stated, even if your estate is not worth millions of dollars, we can help you develop a custom crafted plan that ideally suits your needs.
You can schedule a consultation at our Troy, Michigan estate planning office if you call us at 248-251-1001. There is also a contact form on this site you can use to send us a message, and if you reach out electronically, you will receive a prompt response.