If you are among the richest one percent of Americans, you might incur a so-called death tax when you die. Then again, you might not.
Under current law, roughly 99.6% of us can avoid estate taxes with little or no planning. The rest can also minimize estate taxes—and possibly even eliminate them entirely—by engaging in perfectly legal, though often complicated, tax planning.
Some readers may be thinking, “My parents weren’t ‘one-percenters,’ yet their personal representative had to write a check for estate taxes after both had died.”
The explanation is simple: death tax laws changed dramatically in relatively recent years.
The state of Hawaii and federal government impose estate taxes on the value of a decedent’s property, but only to the extent that the total value of all such property exceeds the available exemptions, deductions, and credits provided by law.
Prior to 1998, the exemption available to every U.S. citizen was $600,000, and the value of any assets above $600,000 was potentially subject to a 55% tax. So an estate with a net value of $700,000 could result in an estate tax of up to $55,000. Even then, quite a few people in Hawaii had estates of more than $600,000, partly because the value of a home here can be much higher than comparable mainland properties.
Currently, in 2015, the exemption is $5.43 million. Yes, $5.43 million. Each individual gets their own exemption, so a married couple can collectively pass nearly $11 million of valuable property to their descendants without paying a penny in state or federal estate tax.
Until several years ago, there was a chance that a married couple would inadvertently “waste” the exemption of the first of them to die. But now, thanks to “portability” any exemption not used when the first spouse dies can be added to the survivor’s own exemption.
Ironically, married couples who once did relatively complicated planning to avoid “wasting” any exemption may now want to revisit their estate plan to remove any unnecessary complexity. The thinking is, “Why make your loved ones put up with unnecessary complexity, expense, and inflexibility?”
This simple overview assumes that all property is located in Hawaii, that each person is an American citizen, and that absolutely nothing is out of the ordinary.
Even if your financial wealth or unusual circumstances make you a good candidate for tax planning, keep in mind that your estate plan should always reflect your values and your wishes. Taxes are the tail, and the tail should never wag the dog.
I am required by the laws governing lawyers to state this is not legal advice and you should not rely on any of this to determine what is in your best interest. This column is intended to provide information about general questions that I frequently encounter in my practice as an estate planning attorney.