The quality of life that people enjoy in the Detroit metro area is very appealing, and the economy is quite vibrant. As a result, there are significant numbers of wealthy people residing here. Clearly, wealthy people have a lot of opportunities to enjoy their lives and pass along robust legacies. However, there is a significant tax that they face, and as Mount Clemens trust attorney, we provide tax efficiency solutions.
In general, inheritances are not subject to regular income taxes, and this would include insurance policy proceeds. Plus, if you were to inherit appreciated assets, you would get a step up in basis. To explain by way of example, let’s say that your grandfather purchased some stock 25 years before his death. The value of the shares was $100,000 when he bought them. He passes away, and he leaves you this stock in his will. The shares are now worth $1 million.
Though there would be a $900,000 gain, you would not have to pay capital gains taxes on that appreciation. You would get a step up in basis, so you would not be responsible for the appreciation and took place during the life of your grandfather. However, if you hang on to the stock, and it continues to appreciate, you would be responsible for future gains.
Federal Estate Tax
As you can see, people of relatively ordinary means do not get hammered by taxes related to inheritances. This being stated, things are entirely different for people with very significant financial resources because of the federal estate tax. The line that exists between those that are exposed to this tax and people that are exempt is the estate tax exclusion. This is the amount that can be transferred before the estate tax would become applicable.
To provide some historical background, in 2010, the estate tax was not in effect at all due to provisions contained within the Bush era tax cuts. It was scheduled to return the following year if no new legislation was passed, the exclusion would have been just $1 million. However, we were spared this fate when The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was signed into law.
Provisions contained within this measure set the estate tax exclusion at $5 million for 2011, and there was a 35 percent maximum rate installed. This particular arrangement expired at the end of 2012, but new estate tax parameters were established at that time. The $5 million exclusion remained with ongoing adjustments to account for inflation, and the maximum rate went up to 40 percent. After a series of adjustments, the estate tax exclusion in 2017 was $5.49 million.
Throughout the year, we were anticipating a new tax relief bill, and there was a lot of talk about a potential estate tax repeal. As it turns out, the federal estate tax is still in place for 2018, and it will be a fact of life for the foreseeable future. However, high net worth individuals got some very good news when the details of the plan were disseminated. In 2018, there is an $11.2 million estate tax exclusion, so it was essentially doubled.
It is important to understand the fact that this is a per person exclusion. As a result, if you are married, you have a $11.2 million federal estate tax exclusion to utilize, and your spouse also has an exclusion. This raises the total amount that a married couple can transfer tax-free to $22.4 million. The estate tax exclusion is portable, so a surviving spouse could utilize his or her own exclusion and the exclusion was afforded to the deceased spouse.
There are 14 states in the union that have state-level estate taxes, and the District of Columbia also has its own estate tax. The exclusions are not necessarily as much as the federal estate tax, so an individual could be exposed on the state level and exempt on the federal level.
Here in the state of Michigan where we practice law, there is no state-level estate tax. However, if you own property in a state that does have its own death tax, you may face exposure in that state.
Obtain More Detailed Information!
If you would like to learn more about estate taxes and other important estate planning matters, we invite you to attend one of our upcoming seminars. They are offered absolutely free of charge, and you can click this link to register for the session that fits into your schedule.