It would be easy to be lulled into a false sense of security when it comes to your estate planning right now based on our current tax law. Basically, there’s no federal estate tax for your heirs if your estate is under $15 Million dollars. More on that in a minute…
But Pennsylvania Inheritance taxes still apply, the federal law can always change, and hopefully you want to create benefits to your heirs beyond just tax savings.
In short, complacency in estate planning, even in the current landscape, can have disastrous and expensive consequences for your children and grandchildren.
The federal estate tax exemption determines the amount of wealth an individual can transfer during life or at death without incurring federal transfer taxes. The exemption is currently high, but this may not always be the case.
There are steps that you may be able to take and opportunities to take advantage of now to ensure that your family’s financial legacy transfers to the next generation as inexpensively and as advantageously as possible in the future.
The consequences of missing a step or an opportunity that’s available to you NOW can be extremely costly for your children - potentially resulting in a $400k federal tax on every $1 Million Dollars of inheritance that exceeds the exemption amount.
With the passage of the One Big Beautiful Bill Act (OBBBA), we are living in a historically high federal estate tax exemption environment. OBBBA created a “permanent” $15 million per‑person estate, gift, and GST exemption that is indexed for inflation. Although the increased exemption amount is “permanent” and is not set to automatically expire or be reduced at some future date, this supposed permanency is subject to the whims of Congress and could change at any time.
Even with historically high exemptions, you can make mistakes that could leave your children with an enormous tax bill.
Portability and Planning Pitfalls - A Cautionary Tale
Several years ago, I heard a terrible story about a family who lost a substantial portion of their estate to federal estate taxes because of several totally preventable mistakes.
There’s a mechanism in federal estate tax law called portability that allows a surviving spouse to preserve and use their deceased spouse’s unused federal estate tax exemption, but it doesn’t happen automatically. You must proactively act to take advantage of this valuable opportunity.
When the husband of this family (we’ll call him John) passed away, he left all assets outright to his wife (who we will call Sue) through joint ownership and under a very old will that had not been updated in over 30 years. John’s Executor thought the estate administration would be simple because everything was transferring to Sue, so he decided to do a DIY (do it yourself) estate administration and did not retain an attorney to assist him.
The value of John’s estate was below the exemption at the time of his death, so the Executor did not file a federal estate tax return (Form 706) to elect portability and claim his exemption (which was over 5 million dollars at the time).
When Sue passed away years later, she still had the same old will from decades ago when the children were all toddlers; just like John, she never updated her estate plan. During the years after John’s death, all of the couple’s assets had grown in value and were all includable in Sue’s estate. Sue also received an unexpected inheritance from her Uncle after John’s death.
At the time of Sue’s death, the total value of her estate was $7 million dollars, but she had only her own individual exemption of $5.45 million available to shelter the kids’ inheritance from federal estate tax.
The result: a $620,000.00 tax bill that could have been avoided entirely
Because John and Sue neglected to update their estate plan and because the Executor of John’s estate did not seek advice and did not elect portability, this family subjected over $1.5 million dollars to a 40% tax … completely unnecessarily.
If John and Sue had planned appropriately, they could have used trust planning strategies and the portability election to take advantage of John’s exemption, and their children could have inherited the entire $7 million dollar estate without paying any federal estate tax at all. Instead, John’s exemption was lost and $620,000.00 went to the IRS rather than to the family.
Don’t let what happened to John and Sue’s children happen to your children and other heirs. You can protect your heirs’ inheritance with proactive, thoughtful estate planning – do not let high federal exemptions fool you into complacency.
The Bottom Line – Complacency Can Be Costly
- Estate planning is not a “set it and forget it” exercise even in our current high federal exemption environment. Life, families, assets, and tax laws change.
- Neglecting your estate plan and making what might seem like small mistakes at crucial moments can have big consequences.
- The best way to safeguard your family’s financial future is regular review of your estate plan and prompt communication with your experienced estate planning attorney during pivotal life events – such as the death of a spouse.
Next Steps – Identify Your Family’s Risks
Do you want to know what risks your family might be facing based on your specific circumstances?
Are you in the “comfort zone” the “yellow-flag zone” or the “red-alert” zone?
What should you do next?
Click Here to take our quiz to find out which zone you are in, and what to consider:
- learn about other missteps to avoid; and
- read more case studies about families like yours and options available to protect them
Additional Resources for Asset Protection
To learn more about how to protect your children’s inheritance from risks like divorce, creditors, and lawsuits and how to ensure that you are setting up beneficiaries with special needs for success, click the links below to watch our recent presentations on these topics:
Beneficiary Controlled Trusts – Protect Heirs From Divorce, Lawsuits, and Taxes
Supplemental Needs Trusts – When Do We Need Them and How Do We Make Them Work Best?
