One of the major motivations for estate planning is to accomplish the transfer of wealth from one generation to the next with that wealth being diminished as little as possible by estate and inheritance taxes. Fortunately, under current law neither Kansas or Missouri has a stand alone inheritance or estate tax. The Federal Estate Tax is based upon the total amount a decedent owns or controls at the time of death, this includes not only real estate and investment account, but also retirement accounts (such as IRAs, 401(k) accounts, and 403(b) accounts) and life insurance which is included at that face-amount of the policies (not the smaller cash-value of the policy that applied during the deceased person’s lifetime. One of the key areas of planning for estate tax purposes is valuation of closely held business interests. Our firm has experience in obtaining qualified business valuations as well as experience in litigating business valuations and valuation discounts.
Estate tax rates and exemptions are a constantly moving target. Major overhauls in estate tax law occurred in 1981 and again in 2001. In 1981, the major changes were that spouses could, for the first time, give each other any amount of property during life or at death free of estate tax, and the amount permitted to be transferred to third parties free of transfer tax was increased to $600,000. The next major change occurred twenty years later, when the Tax Act of 2001 increased the non-spouse limit to $1,000,000 and set that amount in increase in a roughly stair-step process over the next 9 years. In the years leading-up to 2010 there was concern many of the benefit of the 2001 Tax Act would be lost, and the future of the estate tax was very much in limbo for the next several years. In late 2010, a new law was passed that increased the amount of property any one person could pass free of any estate tax to Five Million Dollars, with than amount then indexed to inflation. For example, the 2014 exemption amount was $5,340,000, and the 2016 exemption amount was fixed at $5,450,000.
The other major recent change to the estate tax law became effective January 1, 2013. Under that change married couples were permitted to shares their personal estate tax exclusion amounts and to group unused exemptions together. This technique (called “portability”) was a significant innovation because prior to portability an unused exemption from the estate tax was non-transferrable and effectively wasted if not used. Avoiding this lost-exemption required estate planners to develop a number of complex techniques. Portability combined with the increased exemption amounts has dramatically simplified the estate tax avoidance portion of estate planning.
The 2013 changes to the estate tax law are supposedly made “permanent,” but experience tells us that the only thing certain with regard to taxes is that the law we currently know will not be remain the unaltered law of the indefinite future.