By: Sam Skorepa

What to do with our assets after death is often a difficult topic to discuss. The delicate nature of this discussion and the many activities that compete for our time make estate planning fall to the bottom of our to do lists. Individuals often inquire about estate planning only after significant life events (i.e. marriage, divorce, death in the family, or an upcoming vacation). However, we generally recommend that for an estate plan to be effective and achieve the client’s intentions that it be reviewed every three to five years by the client and/or the client’s attorney to confirm the client’s objectives are being met and compliance with current estate tax planning laws.  If you are planning on meeting with an attorney to discuss your current estate plan or for the preparation of a new estate plan, here is what you need to know for 2016:

• $20,000: The increase in the federal lifetime Exemption Amount

Federal estate and gift tax laws limit the amount that can be transferred to the next generation and other third parties (excluding the spousal exemption).  When dated Wills and Trusts were drafted, the Exemption Amount was lower than current levels and in some cases, much lower.   As of January 1, 2013, the Exemption Amount was “permanently” set at $5 million per person adjusted for inflation.   In 2016, the federal Exemption Amount increased from $5.43 million in 2015 to $5.45 million for each individual.

• No change to the annual gift exclusion amount

For those of you familiar with Section 2503 of the Internal Revenue Code (that’s everyone, right?), it provides for an exclusion to “taxable gifts” so long as those gifts meet certain requirements. For 2016, the annual limitation on excluded gifts remains at $14,000 per person, the same level it has been since 2013. Married couples can “split” their annual gifts so that the couple can give away a combined $28,000 per person on an annual basis.

• Portability is still alive.

Prior to 2011, if one spouse failed to use his or her entire Exemption Amount, it was lost and was not available for the surviving spouse to utilize upon his or her death.  Consistent with the estate tax laws from 2011 forward, the unused Exemption Amount is no longer lost if unused and remains “portable” for use by surviving spouse, which means the Exemption Amount is effectively $10.9 million per couple. However, portability must be elected upon the death of a spouse and to do so, certain requirements must be carefully and timely followed.

• 40% is still the tax rate.

Although there was an increase in the federal Exemption Amount, there is no increase in the effective tax rate for lifetime gifts and distributions, which remains at 40% of the taxable amount of an estate once the Exemption Amount has been exceeded.

• State gift and estate tax laws?

Individuals may also be subject to gift and estate taxes on transfers made during life or after death depending on their State of residence at the time of the transfer or at death.  For example, Iowa does not have a State gift or estate tax, but instead has an inheritance tax which subjects certain individuals to an additional tax from their inheritance.  However, Illinois has a separate State Estate Tax with a distinct Estate exclusion amount from that of the federal Exclusion Amount.

The substantial increase in the Exemption Amount over the past decade or so has furthered the belief (by some) that individuals with less than the Exemption Amount ($5.45 million) in assets do not need estate planning. This could not be further from the truth.  There are many reasons why an individual should have an estate plan, regardless of the immensity (or modesty) of their assets.  Please look forward to my next blog post in 2016 to gain a better understanding of why you should invest in an estate plan.

Sam practices primarily in estate planning, probate & trust administration, and real estate law at Lane & Waterman, and was recently named partner. Learn more about his work at https://l-wlaw.com/attorneys/samuel-j-skorepa/.