Seemingly every presidential election cycle, we hear a lot of talk regarding the “estate tax” or, as its detractors refer to it, the “death tax.” One Forbes commentator called it “one tax that comes about as close as possible to being theft.” Conservative politicians have pledged to repeal it for years (including President-elect Trump) while those on the other side of the spectrum have called for expanding its scope. As of the end of 2016, however, the estate tax has been with us for exactly 100 years in some form or another, having been initially enacted in 1916, and thus any rumors of its demise should take that long history into account. Which leads us to the question, what is the estate tax and who exactly does it apply to?

The Estate Tax Briefly Explained

The estate tax is essentially a tax on the transfer of property on a person’s estate after that person dies. The original reasoning behind the estate tax was to increase funding for the federal government from wealthy individuals while preventing the concentration of wealth within a limited number of families. Since 1948, the estate tax has not applied to any transfers made to spouses.

The estate tax has always applied to a small minority of estates, although that relative amount has fluctuated greatly, with as many as 7% of estates being hit with the estate tax in the 1970s to as few as 0.5% of estates in other times. The reason for the fluctuation is that the rules regarding the amount of assets exempt from the estate tax change based on legislative policy. As recently as 2001, the exemption was only $675,000 whereas the exemption for 2017 is $5.49 million. Note also that the tax rates that will apply to estates change over time as well, with rates going as high as 70% in the late 1970s.

The Current Estate Tax Provisions

While President-elect Trump has pledged to repeal the estate tax, the tax is presently in effect. As noted above, the exemption for an individual in 2017 is $5.49 million, with a married couple’s total exemption being $10.98 million. The current estate tax rate is 40%.

Putting that in perspective, one might take the recent death of Prince whose estate is estimated to be valued at $250 million. That means approximately $245 million (the amount in excess of the individual exemption) is subject to a federal estate tax of 40%. In addition, Minnesota has its own estate tax which goes up to 16%, meaning more than half of the estate is likely to be turned over to the state and federal governments.

Focusing back on just the federal tax provisions, there are estate planning strategies that individuals and families can incorporate to reduce potential estate tax payments, including planned giving and incorporation of trusts over time. An experienced estate planning attorney can provide further information on what types of estate planning strategies might benefit you and your beneficiaries.

Work with a California Estate Planning Attorney

The Ledbetter Law Firm, APC is dedicated to individuals and families plan for their futures through all aspects of estate planning. Contact The Ledbetter Law Firm, APC to see how you can begin creating or updating an estate plan that incorporates the needs and goals of you and your loved ones.

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