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Horizon Elder Law & Estate Planning Blog

Sunday, April 16, 2017

Federal Estate Tax Repeal Could Mean Tax Increase for Californians

Should I postpone making my estate plan until the federal estate tax is repealed?

President Trump has proposed completely eliminating the federal estate tax.  This controversial tax currently remains at 40 percent, but with a Republican House and Senate, it is possible that the tax will soon be reduced or erased.  However, in February, California Senator Scott Weiner introduced a ballot measure that would create a California estate tax in the event the federal estate tax is repealed.  Californians who have been holding out on estate planning till the repeal of the federal estate tax should delay no longer because taxes may just get higher in the state.  

What is the Estate Tax?

The federal estate tax is a tax levied on the net value of the estate of a deceased individual prior to distribution of funds to the heirs.  Federal estate taxes are in addition to probate expenses.  Usually, the estate tax is paid within nine months after your death.  It must be paid in cash, often requiring liquidation of assets to cover the expense.  Estate tax rates are quite high and can significantly reduce the balance of an estate that would otherwise have gone to the heirs.  

How Can I Avoid the Estate Tax?

It is possible to avoid or minimize the estate tax penalty with advance estate planning and tax saving planning.  Currently, federal law exempts $5.49 million per individual.  Married couples can double the exemption.  For many families, the $11 million in potential exemptions will allow them to navigate around the federal estate tax.  Business owners and wealthy individuals, however, will need to take further steps to avoid the estate tax.  Effective use of irrevocable trusts and gift transfers can allow California residents to avoid the estate tax on the federal level.   

What Estate Taxes Could Californians Face If the Federal Estate Tax is Repealed?

California residents may end up paying more in estate taxes under the proposed new law if federal estate taxes are eliminated.  Federal estate tax laws use a step-up in basis to readjust the value of the appreciated asset received by an heir, but the new California law may eliminate the ability of residents to obtain a step-up in basis on the assets received, potentially costing taxpayers far more. California residents should work with an experienced estate planning attorney now to plan to reduce your potential estate taxes.

 


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