There has been a lot of talk in the media recently about estate tax. Estate tax, often called “inheritance tax,” is different than income tax – it is a value based tax. Your estate only pays estate tax if your estate is worth more than the estate tax exemption. The current exemption is $11.7 million, so if your estate is worth less than $11.7 million, then your estate does not pay estate tax.
Due to having this high exemption, estate planning attorneys have been able to draft more simplified living trusts than what we drafted when the limit was significantly lower. However, President Biden has proposed lowering the exemption from $11.7 million to $3.5 million. If you are married, then these amounts double since each spouse receives an exemption.
How will a $3.5 million exemption affect you? For most people, the answer is that the change will not affect you. First of all, many people believe the Congress will likely agree on a higher exemption amount, closer to $5.5 million per person, which is what the limit was around in 2017. If this happens, you would have to be worth over $5.5 million if you are single, and $11 million if you are married, to pay estate tax.
We do not yet know what the estate tax law changes are. However, if you are high net worth, you should speak with an estate planning attorney to see if there is planning you can do before a possible estate tax law change. If you are not high net worth, you should still strongly consider drafting a living trust, not for estate tax purposes, but to protect your assets from the typical high costs associated with property passing through probate court.