Planning with Perspective: Your Family and the Estate Tax

Estate taxes, often portrayed as a looming concern for those with significant wealth, may not be as applicable to the average person as you may have heard. While estate taxes are a reality and impact large estates, the fact is that the majority of families and individuals need not be overly concerned about these taxes affecting their estate planning. If you are concerned about how estate taxes may effect your estate plan understanding the thresholds, exemptions, and practical considerations can help demystify this perceived threat for many.

One of the primary reasons estate taxes are not a significant concern for most individuals is the existence of generous exemptions at both the federal and state levels. In the United States, beginning in 2024, the federal estate tax applies only to estates totaling more than $13.6 million dollars. For the vast majority of people, their estates fall well below this threshold. This exemption, which is subject to change based on legislative updates, provides a considerable buffer for individuals and families.

In addition, married couples benefit from a feature known as "portability." This feature of tax law allows a surviving spouse to use any unused portion of the first spouse's exemption. With careful planning, this effectively doubles the amount that can be passed on free of federal estate tax. This feature adds an extra layer of protection for the average individual or couple.

Moreover, California does not have an estate tax. If you are a resident of California, there is no estate tax concern from the state level.

The misconception that estate taxes apply to all or most estates often stems from near-constant legislative wrangling of these laws. Legislative proposals to expand or contract estate taxes are often floated in the US Congress. Despite this, the state of the law remains relatively consistent: Estate taxes mainly apply to large estates, with the exemption levels increasing over time.

Once you understand the extent of your total estate and the estate tax exemptions, you can make a good choice about how much to be concerned about how estate tax may impact your family. Going forward, you should continue to keep these ideas in mind as tax laws, exemption amounts, tax rates, and other relevant factors may change over time. You should check in with your estate planning attorney and financial advisor whenever there is a major change in your financial situation.

For the average person, focusing on other aspects of estate planning, such as asset distribution, guardianship for minor children, healthcare directives, and overall financial management, may be more pertinent than fixating on potential estate tax liabilities. Engaging in comprehensive estate planning addresses personal and family needs holistically and provides peace of mind without the stress associated with undue concerns about estate taxes.

Take Away: Broad concerns about estate taxes are not warranted for most people. The US Congress provides generous exemptions and portability for married couples which protect most families, even those with considerable wealth.

As always, it is essential to stay informed about the current tax landscape and be mindful of potential legislative changes. Working with an estate planning attorney ensures that you have an effective and custom-tailored estate plans that fit your unique circumstances.