It is a good feeling to watch your home go up in value, and in some areas, the prices have dramatically increased over recent years. This is a great development for homeowners and savvy investors, but there is an estate planning dimension to keep in mind.
Federal Estate Tax
Your real property is part of your estate for tax purposes, so property value increases can be a factor on this level. We use the term “can be” because the relevance will depend on the overall value of your estate.
There is an estate tax exclusion that can be used to transfer a certain amount before the tax would potentially be levied on the remaining portion.
A $5 million exclusion was established in 2011 when a piece of tax legislation was passed, and this figure was retained indexed for inflation through 2017. During that year, the exact amount of the estate tax exclusion was $5.49 million.
The Tax Cuts and Jobs Act was enacted at the end of 2017. One of its provisions doubled the exclusion, and an inflation adjustment was added. This resulted in an $11.18 million exclusion in 2018. After a series of adjustments, the exclusion is $11.7 million this year.
There are couple of details that apply to married couples. Spouses can transfer unlimited assets between one another free of the estate tax, as long as they are American citizens.
A surviving spouse can use the unused portion of their deceased spouse’s exclusion. This arrangement is called “portability” in tax and estate planning parlance.
Lifetime gift giving is not an option as an estate tax efficiency strategy, because there has been a gift tax in place continuously since 1932. The two taxes are unified, so the exclusion is a unified exclusion that applies to your estate and lifetime gifts.
However, there is a separate gift tax exclusion that allows you transfer up to $15,000 each year to an unlimited number of gift recipients. You can also pay school tuition for others tax-free, and there is an exclusion that allows you to pay medical bills for others in a tax-free manner.
Estate Tax Exposure
Significant increases in real property values could push your estate into taxable territory, and there are some additional considerations. The provision in the Tax Cuts and Jobs Act that established the record high exclusion is going to expire at the end of 2025.
In 2026, the exclusion is going back to $5.49 million unless changes are implemented in the meantime via legislative mandate. If there are any changes in the near future, they are not going to be positive if you have estate tax concerns.
The For the 99.5 Percent Act has been introduced into Congress. If this legislative measure is signed into law, the federal estate tax exclusion will go down to $3.5 million.
There would also be a change in the rate. Right now, the maximum estate tax rate is 40 percent, but it would go up to 45 percent for estates valued at $10 million dollars or less. The rate would rise to 45 percent for the next bracket, and it would continue to graduate upward.
Estates that are valued at more than $1 billion would be taxed at a 65 percent rate under the terms of this bill.
The gift tax parameters would also be changed. People that are exposed to the estate tax typically use the $15,000 annual gift tax exclusion to fund irrevocable trusts and/or family limited partnerships.
There is no limit to the amount that can be transferred, as long as the gifts to individuals do not exceed $15,000 per person. Under the terms of this measure, there would be a $15,000 total limit on gifts to trusts and some pass-through entities like family limited partnerships.
State-Level Estate Tax
Here in Illinois, we have a state-level estate tax to contend with as well. The exclusion is $4 million, and the top rate is 16 percent, so this is another potential source of legacy erosion.
We Are Here to Help!
Fortunately, there are estate tax efficiency strategy that can be implemented. And of course, we can help you devise a custom crafted plan if taxation is not a source of concern.
If you are ready to get started, you can schedule a consultation at our Naperville estate planning office if you call us at 630-568-8611. There is also a contact form on this site you can use to send us a message, and if you reach out in this manner, you will receive a prompt response.