There’s a saying that death is hardest on those left behind. This is especially true if those left behind receive an unexpected and hefty estate tax bill. Estate taxes—or “death taxes,” as they’re often called— can be burdensome. Perhaps the most challenging thing about estate taxes is that they’re always changing and we generally don’t know if we’re going to die in a year when estate taxes favor our heirs.
Jason Smolen
For example when George Steinbrenner died in 2010, there was no estate tax. Mr. Steinbrenner’s heirs did not have to pay federal taxes on his $1.15 billion estate. Needless to say, 2010 was an anomaly— the residual effect of President Bush’s phased-out tax cuts. When the estate tax expired at the end of 2009, most people expected Congress would reinstate it. They didn’t. As a result, the heirs of those who died that year did not have to pay any estate taxes.
In the years that immediately followed, there was a lot of uncertainty as individuals and their attorneys waited to see if Congress would act. If Congress chose not to act, the estate tax law would have reverted to what it was in 2001 and any estate valued at more than $1 million would have been taxed at a rate of 55 percent. Note that the valuation of a $1 million estate includes real estate, and many homes in high-dollar real estate markets can easily be valued at more than $1 million. This leaves heirs with little after the sale of the house.
With this uncertainty, it was hard to plan. The possibility that the law would revert to the $1 million tax exemption level at the end of every year worried people. So, anticipating the worst, people acted. Starting in 2011, an individual could give away to others up to $5 million tax free—and many did just that. In an effort to protect their estate from taxation, many people increased their gifts to their loved ones. The idea being that if they died during a year when Congressional inaction resulted in a punitive estate tax, their heirs would have already received some of their legacy tax-free.
Now, four years later, the $5 million unified estate and gift taxes exemption has held steady. (Because it’s indexed for inflation, this year an individual can give away $5.43 million without it being taxed. Note that there is an unlimited charitable deduction and there is an unlimited marital deduction provided that your spouse is a US citizen.) But some people are beginning to wonder if they gave away too much, too soon.
For example, a number of people started aggressively gifting money when they were still working. Now that they’re retiring, they are beginning to wonder if their estate is sufficient to see them through their retirement years. It’s a very different feeling to be living on resources instead of earning resources. It’s not uncommon to be concerned about spending down principal and outliving it.
Daniel Ruttenberg
When planning your estate, you should give serious consideration to the “what ifs” that loom down the road and structure your estate accordingly. While giving money tax-free to your loved ones is nice, make sure you can take care of yourself. It is important to be prepared. You don’t want any surprises when it comes to your finances. Below are things to consider to make sure you keep what you need while still giving away what you want:
1. Be realistic about your expenses. Most people underestimate what they spend. They focus on the mortgage payment, a car payment, insurance, and the groceries but discount the monies spent on clothes, travel, hobbies and pets, home repairs, and utilities? The truth is, we all spend more money than we think we do. When planning your gifting, look at what your estate’s worth and carve out a realistic amount of money for what you’ll need to live comfortably and do the things you love over the course of many years. Even if you have long-term care insurance, you may still need to pay for nursing care or help if your health fails – this is something else you should consider. Work with your attorney to project future expenses and plan accordingly.
2. Don’t be afraid to reevaluate. If you’re someone who gave away a lot of money in recent years and are now beginning to worry it might have been too much, don’t panic. Sit down with your estate attorney and look at how much you gave, how much you have left and how much you need to live on. If you need to scale back for a few years and not gift to others for a while, that’s okay. Don’t let the fear of possibly punitive estate tax laws dictate your actions to the detriment of your own financial security.
3. Live the plan. Once you have a plan, live it. It’s hard to transition from making your assets grow to living on them. It leads to a lot of second guessing. But chances are, if you created an estate plan with your attorney, you’re on the right path. If you have questions or are worried that you need to modify your estate plan, then certainly sit down with him or her again and talk it over.
Again, the trouble with the future is that it’s uncertain. We don’t know what Congress will do and we don’t know when we’re going to die. But despite this uncertainty, it is possible to plan so you’re able to live the life you want to live.
Read more articles from the Summer 2015 Report from Counsel here.
