Every year we wait in anticipation…no not for holiday music to start playing in the mall…but for the Internal Revenue Service to release the amount you can pass estate tax free upon your death (the Unified Credit Against Estate Tax). Alright, perhaps I am stretching the level of anticipation, I mean I am very excited to start listening to holiday music again. However, in all seriousness, as we sit around with our families over the holidays, many will wonder what will happen to their family farms and small businesses when they pass away, how will their children afford to keep the operations running if they face a large estate tax bill, and how large will their estate tax bill be?
The Federal Estate Tax is a tax on your right to transfer property upon your death. The value of your estate for federal estate tax purposes is determined by taking your Gross Estate, minus any deductions, plus any lifetime taxable gifts. Your Gross Estate includes the fair market value on all of your property (cash, securities, real estate, life insurance, annuities, business interests, and all other assets) as of your date of death. Your Taxable Estate is then determined by taking your Gross Estate minus any eligible deductions (mortgages, estate administration expenses, property passing to qualified charities, etc.). Then, the value of any lifetime gifts that exceeded the Annual Exclusion for Gifts (the amount you can gift to any person tax free) in the year the gift was made is added to your Taxable Estate. If the value of your Taxable Estate exceeds the unified credit amount, then that amount in excess may be taxed at the rate of 40%.
So is the IRS in a gifting mood? Unfortunately, Santa’s bag is a little lighter this year. The Unified Credit Against Estate Tax in 2016 is $5,450,000 per person, only a $20,000 increase from last year. Further, the Annual Exclusion for Gifts in 2016 is $14,000 per person, the same as last year. Although we did not see the increase we have grown accustomed to in the last couple of years, the Unified Credit is still the highest it has been in the last ten years. So play your holiday music, enjoy the time with your loved ones, and feel confident and secure that your Thompson Law Estate Plan will pass on your legacy (just maybe not your taste in holiday music).