Federal estate tax will increase for 2016
The Internal Revenue Service recently announced that the federal estate and gift tax exemption would be raised for 2016. This increase can impact the way that wealthy individuals in California handle their estate planning.
The exemption amount was $5.43 million and will be increasing by $200,000 up to $5.45 million for 2016. The exemption applies to estate taxes and gift taxes per individual. Therefore, a married couple can have $10.9 million exempted. One common estate planning technique is for wealthy individuals to spend down their assets to stay below the relevant threshold. However, fewer and fewer people have had to worry about this problem in recent years due to the high exemption rate. Less than 15 years ago, the exemption limit was only $675,000. The highest estate tax rate is 40 percent for the portion that exceeds the exemption limit.
Although the exemption amount for estate taxes increased, the annual gift exclusion remains the same at $14,000. Individuals can make as many gifts to others up to that amount each year as they wish to provide. However, they must keep track of these gifts as they do go toward the exemption amount. Although one spouse may pass all of his or her possessions to the other spouse at death without incurring an estate tax, certain steps must be taken to complete this process. The surviving spouse must elect portability on the estate tax return. Additionally, if the surviving spouse then has over the exempted amount at the time of death, the second estate can be hit with a sizable tax bill.
People who believe that they may be facing federal estate tax may choose to consult with an estate planning lawyer. Legal counsel may suggest certain types of techniques that can help to avoid or minimize this tax.