We are well into the New Year and now your wealthy clients can pass away a little richer than if they had not made it to the most recent Rose Parade. Here are three things to pass on to those you advise concerning taxation of their estate at death:
The federal gift and estate tax lifetime exemption has been increased
This year the lifetime exemption is $11.4 million for every taxpayer – up $220,000 from last year. The annual gift tax exclusion amount remains at $15,000 per calendar year per taxpayer per donee, but remind your clients that, in most cases, medical, dental and tuition expenses paid directly to the provider on behalf of another are not considered taxable gifts.
But don’t be too quick to oversimplify and think that unless someone’s net worth is excessively north of “five rocks” (ten for a married couple) then there is no need to pay much mind.
Danger may still lurk below the federal level
About half the states have their own legislative intrusions into the wealth of deceased residents either in the form of an estate tax (payable from the assets of the deceased) or an inheritance tax (payable by the heirs). New Jersey and Maryland have both!
The tax rates are not as high as the 40% federal bracket, but in many cases the protective exemption amounts are much lower. Keep in mind, too, that a client’s residence in a state without a death tax does not protect assets they may have in another jurisdiction that does.
Portability won’t hold water unless…
When working with wealthy married couples it is good to remember that the rollover of one spouse’s unused exemption amount at the first death (often referred to as the DSUE – deceased spouse’s unused exemption) is not automatic.
In order to preserve the unused exemption for the estate of the surviving spouse a federal estate tax return must be filed within nine months after the death of the first spouse.
The most common planning device among high net worth clients for dealing with unavoidable anticipated taxes at death is the use of life insurance to pay the bill, usually held outside the taxable estate in an irrevocable trust.