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Be Wary of Estate Tax Provisions in the Proposed Fiscal Year 2016 Budget

It's time to call your estate and financial planners - new tax provisions in the proposed FY 2016 budget once again show the specter of potentially brutal taxes at death for the moderately wealthy. While these taxes exist only in the proposal stage for now and have to pass through the gauntlet of an opposition Congress, it's never too early to take a look at your estate and plan ahead.

The first provision of concern is the limitation of the ability to "step-up" the basis of inherited assets. The death of a taxpayer would be treated as if the assets at issue had been sold in a taxable transaction, and any capital appreciation would be immediately taxed at the capital gain rate. Capital gains of up to $200,000 per couple or $100,000 per individual would be exempt, as would most tangible personal property. Luckily, there are some restrictions on this potential tax. First, no tax would be due on assets owned by couples until the death of the second spouse. Couples also would get an extra exemption of $500,000 for their primary residence (or $250,00 per individual). Also, inherited small, family-owned and operated businesses would be exempt from the tax unless and until the business is sold. Closely-held businesses could also pay the tax off over 15 years.

The second provision to which moderately wealthy taxpayers should pay attention is the potential adjustment of the estate tax back to 2009 levels. FY 2015 carries a $5.43 million exemption amount indexed to inflation and a 40% estate tax rate. The proposed estate tax levels would top out at 45%, and the exemption would reduce to $3.5 million, with no further indexing for inflation.

As mentioned earlier, these provisions still face an opposition Congress, and most of the scarier elements could be watered down in the final analysis. All the same, now is the time to review your estate plan to see just how prepared it is for these potential changes in estate tax law. If you aren't prepared for them, call the attorneys at McBrayer to help you evaluate how to minimize your estate tax obligations under these potential estate tax changes.

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Terri R. Stallard is a Member of McBrayer, McGinnis, Leslie & Kirkland, PLLC and practices from the Lexington and Louisville offices. Ms. Stallard concentrates her practice in the areas of estate planning, trust and estate administration, and charitable planning. She is licensed to practice law in Kentucky, Georgia, and Tennessee, and in the U.S. Tax Court. She can be reached at tstallard@mmlk.com or (859) 231-8780, ext. 258.

This article is intended as a summary of federal and state law and does not constitute legal advice.

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