As I have previously written, the estate tax is imposed upon taxable estates of more than $3,500,000. Any amount over $3,500,000 is currently taxed at the rate of 45%. As an estate planning attorney, my clients generally fall into one of three categories:
- People whose assets are far below the lifetime exemption
- People whose assets are somewhere between slightly below and slightly above the lifetime exemption
- People whose assets are considerably above the lifetime exemption.
For clients in the first category, which these days is the vast majority of my clients, there is very little “tax” planning. Estate planning consists of lifetime incapacity planning, and determining the best way to transfer assets to heirs while protecting those assets from potential creditors and maintaining some level of control, if so desired. For clients in the second category, most of the tax planning involves structuring the client’s assets so that the estate tax does not apply to them. One strategy would involve a husband and wife dividing their assets between them, so that neither one owns assets above the lifetime exemption.
However, there are certain clients whose wealth is so far above the lifetime exemption, that no amount of planning is going to make the estate tax not apply. For them, their estate is going to owe a tax on 45% of their taxable estate. The question then becomes, what is the fair market value of the property in the estate? For money, stocks, and bonds the answer is easy. For other intangible property, the question is a lot more difficult. There are techniques that estate planning attorneys use both when a client is alive and after the client has died to set the value of specific assets. I will discuss some of these methods in future posts, probably in regards to the Michael Jackson estate.
Know for now that with regards to the estate tax, “The fair market value is the price at which the property would change hands between a hypothetical willing buyer and a hypothetical willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”