If you are done with your holiday shopping and wondering what to do with your time, you may want to pull out your estate plan to make sure everything in it and everything affecting it are up to date. Before your credit card bills come in, take a few minutes to work through a few tax questions either on your own or with your attorney.
Estate tax and gift tax. Michigan is one of the many states that do not levy an estate or gift tax. That does not mean, however, that the federal estate tax does not apply. The good news here is that the effective rate will remain the same at 40 percent.
Estate tax and lifetime gift exclusions. While it may not be fun to pay the tax, the good news is that is not taxed, and the exclusion increases every year. In 2016, the most you can exclude is $5.45 million -- nearly $4 million more than you could a decade ago. The exclusions allow you to transfer property or to make fairly generous gifts to your loved ones without incurring a tax penalty.
Lifetime gift exclusion for married couples. If your spouse passes away before he has reached his lifetime gift threshold, you may transfer all or part of the unused portion in addition to yours without worrying about taxes. The limit for couples is $10.9 million, so, if your wife distributed just $4 million of her $5.45 million exclusion before she passed away, you may distribute the remaining $1 million in addition to your own $5.45 million before the tax will kick in.
Annual gift exclusion. The federal government would rather not have you give everything away in one year. As a result, only $14,000 of what you give to any one person is tax-free. There are exceptions: You can give your spouse as much as you want without losing the exclusion, and you can pay for a loved one's medical care or education without worrying about the $14,000 limit. Tax advisers do suggest that a wise taxpayer will make payments directly to the institution rather than the family member.
Penalties for complacence. You may not think your estate will ever be worth $5.45 million, or that you will ever be able to give $14,000 to anyone in one year. This does not mean you should not have an estate plan. Regardless of the size of your estate, you can save your family money and some very large headaches by planning ahead.
Source: The Motley Fool, "Estate Planning in 2016: Here's What You Need to Know," Dan Caplinger, Dec. 11, 2015