History of Estate Taxes
Estate Tax in America was initially instituted in 1797 to help fund the U.S. Navy. It has been repealed and reinstated on several occasions. The current estate tax was implemented in 1916. In the beginning, congress’s purpose was to restrict the concentration of wealth in the United States of America.
Recent History
With Estate taxes, certain things are deductible from your “taxable estate.” Some of these things are funeral costs, all debt obligations, and the estate tax exclusion amount. This exclusion amount has changed a lot over the years, but essentially it is a portion of the estate that the government is willing to exclude from the estate tax.
For example, in 1986, the Estate tax exclusion amount was $500,000 for a single person. In 2000 it had grown to $675,000. That is not a whole lot of assets that your family would be able to keep after a lifetime of saving and sacrifice. This is notable because the highest estate tax rate was over 50%.
Here is an example for you. We’ll say it is the year 2000, and you have an estate of precisely 5 million dollars in net asset value. Assuming you are married and have a spouse, your exclusion would double to $1,350,000.
Assuming funeral costs are $50,000 and you have personal or other debt obligations totaling $550,000. All in all, your taxable estate would come out to $3,050,000.
According to the highest tax bracket in which this estate would likely fall, the estate tax would come out to $1,677,500, a staggering amount. This amount is especially poignant considering the rigid nature of the deadline set by the IRS for the decedent’s family to pay.
When the date is fixed, there is no negotiation. Most families do not just have $1,677,500 stored away in cash. Most estates have their capital value tied up in assets such as stocks, real estate, businesses, property, etc. As a result, many families experienced a liquidity issue when estate taxes were due. A family in Texas experienced this exact situation, and the family was forced to sell multitudes of real estate properties at a significant discount to get the necessary cash to pay the estate taxes.
2000-2022
In the last two decades, the exclusion amount has risen and has gone from $500,000 in 2000 to $12.06 Million. That is a considerable increase, primarily due to the “Tax Cuts and Jobs Act” of 2017. This has undoubtedly increased the exclusion amount past the threshold needed for the average American.
In the past, Estate planning was a significant piece of financial planning to help avoid estate taxes through early and intentional planning. Trusts have been a widespread tool in the legal and financial worlds to protect assets from estate taxes. Even though the exclusion amount is so high now, estate planning remains an essential part of everyone’s financial picture due to several important reasons.
Wills & Trusts
As mentioned before, trusts have been an excellent tool in estate planning to shelter assets from estate taxes and assist in the distribution and protection of assets. Trusts are a very effective tool because they create a separate legal entity to which a client may transfer assets. Some assets need to be retitled when they are transferred to a trust, such as a real estate deed, to be legally owned outright by the trust itself.
A will is an essential aspect of estate planning that is often paired with a trust or created simultaneously. A will is a legally binding document signed by the owners of an estate. The primary purpose of a will is to dictate how assets will be distributed to beneficiaries after the passing of the owner(s) of an estate. A will may also designate guardians for any minor children. When the owner of a will passes, the will goes to a probate court to be verified. Once it is verified, an executor is assigned to take care of the settling of the estate.
In the absence of a will, the state in which one resides will create one through a probate process in court. The probate court will consult with the nearest kin and assign an executor of the estate during the probate process. Then, the probate court will move forward and make final decisions on the distribution of assets and the assignment of a guardian for minor children.
People who wish to have a say in how their assets are distributed or who becomes the guardian of their minor children should and need to outline these things in a will. In other words, a will is the only way to legally have a voice in who raises your children if you die. This is important. It is the responsibility of parents to provide for their children, and this would be one avenue in which they should act. Family members and others can help to educate and encourage these actions.
Idaho Medical Association Financial Services: We’re Here to Help!
Trusts and Wills are just a few of the Estate and Financial planning tools that we use here at Idaho Medical Association Financial Services to guide and assist our clients as they navigate their path to wealth and its management. We partner with our clients to help them achieve their goals and plan for their future by specializing in investment opportunities for doctors and healthcare professionals. If you are interested in utilizing the services of one of the best fee-only money managers in the industry, contact Idaho Medical Association Financial Services today at 1-(208)-504-1736.
