One of the most extreme sources of asset erosion that must be taken into consideration when you’re planning your estate is the federal estate tax. You may hear it said that the estate tax is not something that ordinary people have to worry about because it is only levied on “the rich.” The reality is that you don’t have to be someone who was born with a silver spoon in your mouth to be exposed to the estate tax, especially given the fact that the parameters are scheduled to change in the beginning of 2013.
Whether or not your estate is exposed to the estate tax is going to depend on its value relative to the estate tax exclusion that is in place at the time of your death. At the present time, the estate tax exclusion is $5 million and the maximum rate of the tax is 35%. What this means is that only the portion of your estate that exceeds $5 million in value is subject to this 35% federal levy. These parameters are in place due to the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 last December.
This tax relief act is going to expire at the end of 2012. If it does in fact sunset without any new legislation having been passed that impacts the estate tax parameters, the estate tax exclusion will be reduced to just $1 million in 2013 and the maximum rate of the tax will come in at 55%. If you and your spouse worked diligently throughout your lives, purchased property that appreciated, inherited some assets, and planned intelligently for the future all along the way the value of your legacy may indeed exceed $1 million even if you do not consider yourself to be wealthy.
While it is possible that there will indeed be changes to the laws that raise the exclusion before this tax act sunsets at the end of next year there are no guarantees. It would be wise keep a close eye on the matter and stay in touch with your estate planning attorney as the expiration of this act draws nearer.