The federal estate tax has been radically changed recently so that fewer and fewer people are exposed to the tax. The threshold that you must pass before there is a tax imposed is $5 million of assets indexed for inflation. That indexing means that for 2015 the threshold is $5,430,000.00. Another recent change in the tax law is what has been called portability. What that means is that for a married couple, the first spouse’s unified credit amount (the threshold) can be used at the second death rather than used at the first death. It is, in effect, portable, carried by the surviving spouse to be used later. To qualify for portability, however, an estate tax return must be filed at the first death. There’s a great deal of decision making that is involved in whether or not to rely on portability. There is a separate tax – the generation-skipping tax – which is designed to make sure that trusts are now structured to effectively take property out of the tax system yet make it available generation after generation for someone’s decedent. The generation-skipping tax also has a high threshold of $5,430,000.00 as of 2015. What this means is that a trust can be created at the first death that is designed to benefit all of the surviving spouse plus all future generations without those assets coming back into the taxable estate of those future generations. Unfortunately, portability does not apply to the generation-skipping tax. Therefore, if you don’t create the trust at the first death for a married couple, you are limited to one generation-skipping trust in the amount of the $5,430,000.00 limit at the second death, rather than having two trusts in that amount. In other words, every client really needs to think about the tax structure when they are doing their planning and decide how they want to structure their estate plan. Just because these thresholds are high does not mean that the need for planning has disappeared.
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