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Estate Planning in 2016: Here's What You Need to Know

By Dan Caplinger – Dec 11, 2015 at 8:00AM

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Make sure you're up-to-date on the basics of planning your estate.

Image source: David Morris via Flickr.

Estate planning is a complex area of the law, with countless rules that can change from year to year. If you're planning on doing estate planning for the first time in 2016, or merely want to make sure your current planning documents aren't out of date, staying on top of the latest changes is crucial. Below, you'll find some of the must-know facts that will affect estate planning in 2016.

1. The lifetime gift and estate tax exclusion amount rises to $5.45 million in 2016.
The tax laws provide for a unified gift and estate tax credit that allows people to make gifts during their lifetimes and to transfer estate property to heirs free of tax, up to a certain amount. The lifetime exclusion amount is adjusted for inflation each year, and for 2016, the amount is $5.45 million, up $20,000 from 2015.

That amount has increased dramatically over the past decade, with the limit having been at $1.5 million as recently as 2005. The result has been that many people have a false sense of security that they don't need to do estate planning at all, but the tax aspects are only a minor part of the broader whole, which involves making sure your assets go to the people you want to have them.

2. The annual exclusion amount for gifts remains at $14,000.
Before you have to tap into your lifetime exclusion amount, you're allowed to give up to a certain amount to as many individuals as you want. That amount adjusts for inflation but is rounded off in thousand-dollar increments, and the increase this year wasn't enough to boost this annual exclusion amount from the $14,000 in 2015.

Note that you can make some gifts on top of this amount. For instance, gifts to a spouse aren't subject to annual limits. Gifts you make for medical care or education aren't taxable regardless of the amount, with the caveat that you should transfer those funds directly to the institutions involved rather than to the patient or student incurring the expenses.

3. The effective tax rate for the estate and gift tax remains at 40%.
The estate tax bracket structure is complex on its face, but because of the way the lifetime exemption works, the practical result is simple: Any amount that's taxable for estate tax purposes is taxed at a 40% rate. Higher rates of up to 55% applied in the past, so if someone made taxable gifts earlier in life and passes away, those administering the estate should look closely to make sure they didn't effectively overpay their final tax liability.

4. Portability of the lifetime exclusion amount is still available.
Beginning in 2011, the estate tax laws made it permissible for a surviving spouse to take advantage of any unused lifetime exclusion amount from the estate of the deceased spouse. This dramatically simplified estate planning and gave married couples an easy way to take maximum advantage of both spouses' exclusion amounts. For 2016, portability allows couples to transfer $10.9 million of taxable property to heirs without estate tax. It's important to understand that estates need to make an election to pass any unused exclusion amount to the surviving spouse.

5. Don't forget about your state's gift and estate tax laws.
All of the rules above cover federal estate taxes, but many states impose gift and estate taxes of their own. Among them, you'll often find lifetime exclusion limits that are far lower than the current federal level. In recent years, states such as Indiana, Kansas, Ohio, Oklahoma, North Carolina, and Tennessee have repealed estate taxes, while others like New York and Maryland have moved to increase the exclusion amounts. Yet with several states still imposing these taxes, using some of the estate planning techniques that are no longer necessary to avoid federal estate taxes might well help you avoid tax liability at the state level.

Estate planning isn't something that most people think about very often, but neglecting it can be a costly mistake for your heirs. By staying on top of the changing rules, you can make sure your estate plan will achieve your intended purpose of helping your loved ones after you're gone.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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