The inevitability of taxes is considered to be one of the two certainties in life, with death of course being the other.
Okay…so death and taxes are sure things. But does the connection stop there?
Unfortunately, the answers is no. The existence of the federal estate tax would imply that the powers that be feel as though death is in fact a taxable event.
The assets that comprise your estate were accumulated with funds that you were able to retain after you paid taxes on your income. Of course the taxes didn’t stop there; you paid sales tax on all of your purchases, property tax, capital gains tax, and countless taxes that come in under the radar such as hospitality tax, gasoline tax, and alcohol and tobacco tax.
The money that you have left over sits safely in the bank or wherever you happen to have placed it and is not subject to taxation. But when you die, these resources suddenly become taxable for some reason.
In addition to the contention that the estate tax is an exercise in double taxation, it is a high-stakes lotto of sorts. When you die could have an enormous impact on the amount of money that the government will allow your family members to keep.
Back in 2009 the estate tax exclusion was $3.5 million and the maximum rate of the tax was 45%. So if an individual was to pass away during that year with a legacy valued at $5 million, the estate tax liability would be $675,000, no small sum.
This year and next year the estate tax exclusion is $5 million, so the family of the same individual would face no estate tax liability if he or she was pass away during one of these two years.
But if we see no changes to existing laws, the estate tax exclusion is going down to $1 million when 2013 rolls around, and the rate of the tax will balloon up to 55%. At that time a $5 million estate would be looking at $2.2 million in estate tax liability.
This is rather bizarre indeed, but it is the reality at hand. The best way to respond is to stay in touch with your estate planning attorney so that the necessary adjustments can be made as the estate tax parameters change.