There has been a huge real estate boom in this country for a number of years at this point. In some areas, housing prices have soared at accelerated rates, and this is exciting for homeowners and investors.
However, from an estate planning perspective, a significant increase in real estate values can create estate tax exposure.
Federal Estate and Gift Tax
The federal estate tax is poised to extract a sizable portion of your legacy if you have been very successful from a financial standpoint. It carries a 40 percent maximum rate, but a significant amount can be transferred tax-free.
This dollar figure is called the exclusion, and at the time of this writing in 2021, the federal estate tax exclusion is $11.7 million.
There are a couple of provisions for married couples, and one of them is the unlimited marital deduction. If you are married, you can leave any amount of property to your spouse free of the federal estate tax, but this deduction is only available to American citizens.
When the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was enacted, the estate tax exclusion became portable. This means that a surviving spouse can use the exclusion that would have been available to their deceased spouse.
Can you give gifts to avoid the estate tax? The answer is yes and no. There is a gift tax in place, and it is unified with the estate tax, so the multimillion-dollar exclusion applies to lifetime gifts and your estate.
That’s the bad news, but the good news is that there is an additional annual exclusion. You can give as much is $15,000 to an unlimited number of people each year tax-free without using any of your unified gift and estate tax exclusion.
There is another exclusion that you can use to pay school tuition for students, and there is an exclusion that allows you to pay medical bills for others in a tax-free manner.
Your home and any other real property that you may have would be part of your estate for tax purposes, and there is an added consideration. The $11.7 million exclusion that we have this year is a record high, and it is coming down in the near future.
On January 1, 2026, the provision in the Tax Cuts and Jobs Act that increased the exclusion will sunset. At that time, it will revert to the $5.49 million figure that was in place in 2017, indexed for inflation.
New York State Estate Tax
The federal estate tax is not the only tax that can take a bite out of your legacy. Here in New York, we have a state-level estate tax to contend with as well, and the exclusion is $5.93 million this year.
Also, unlike the federal estate tax, the New York estate tax exclusion amount is not portable for married couples.
There are 11 other states that have state-level estate taxes, and the District of Columbia has its own estate tax. If you own valuable property in a state with an estate tax, even if you are a New York resident, the tax would be applicable if its value exceeds the exclusion.
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We understand the fact that taxation is not going to be a source of concern for most people, so we are here to help regardless of your financial situation.
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