A group of 36 billionaires, millionaires and business leaders has signed a proposal to reduce the current exemption and increase the estate tax, stating that it's "morally and economically" the right thing to do.
The group is called United for a Fair Economy and counts among its members Berkshire Hathaway CEO Warren Buffett and Vanguard Group Inc. founder John Bogle. It is proposing a tax of 45 percent on estates valued at more than $2 million per individual. Currently, the estate tax is 35 percent on estates above $5.12 million per individual. Unless Congress acts, the exemption will drop to $1 million and the tax on estates above that will rise up to 55 percent.
It's likely that, with or without the support of the superwealthy, the estate tax will increase sometime next year. But with effective planning and various trusts that reduce the size of an estate, their wealth is already pretty well-protected from taxes. It's the less wealthy -- those with $1 million to $5 million -- who could be on the hook for higher taxes.
Rosanne Duane, a Jupiter, Fla., estate planning attorney, says that although $5 million seems like a lot, if you take into account all the assets that make up an estate, including real estate, it's not a huge amount. In light of the uncertain economic environment, most of the millionaires in this group can't afford to give away too much now to reduce their estate in anticipation of higher taxes next year, she adds.
Still, there are some quick and easy actions you can take to comfortably reduce the size of your taxable estate in the few weeks remaining before the end of the year.
Currently, individuals are allowed to make gifts of up to $13,000 per person to as many people as they want, free of gift tax. Married couples can give away $26,000. Gifting during life instead of at death means that donors are able to see the positive effects of their gifts and, at the same time, reduce the size of their taxable estate. They can also easily control the amount of money they are comfortable parting with, Duane says.
Another relatively simple way to move even more money out of your estate and leverage the annual gift tax exclusion is to front-load a college 529 plan for children or grandchildren, Duane says. Individuals or couples can give five years' worth of the exclusion amount in the first year, meaning an individual can fund a 529 with $65,000 the first year, or a couple can contribute $130,000.
Finally, Duane says, a tax-free donation to the charity of your choice, perhaps using low-basis stock to also remove the potential appreciation from your estate, is a good move that can be accomplished quickly.
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