Regardless of your political preference, it’s likely that you’d welcome the repeal of the estate tax, as promised by President Trump when he was on the campaign trail. But remember that few Americans are wealthy enough to pay taxes on the federal level, and most of us must prepare for state estate taxes, regardless of whether or not the so-called “death tax” is repealed.
A recent Forbes article asks “Do You Still Need An Estate Plan If There Is No Estate Tax?” The article notes that it’s worth recalling that the estate tax laws in place for 2017 were set four years ago. This includes an exemption for individuals up to $5.49 million and $10.98 million for a couple for 2017. There’s also no tax collected when one spouse dies and leaves everything to their spouse. Therefore, the repeal of the estate tax would really only affect those with a net worth of over $11 million. The rest of us are finding ways to preserve and protect our assets for beneficiaries, rather than fretting over the tax repeal possibilities.
Estate tax repeal or no estate tax repeal, you’re still going to need an estate plan, with financial and medical powers of attorney. A repeal won’t address who’ll receive your assets, retirement benefits or the proceeds from a life insurance policy when you pass away. If you also have minor children, you’ll need to designate a guardian who’ll care for them if you die, especially if any have special needs.
You also want to time when your heirs can access the assets you pass to them, so that a large sum of money doesn’t land in the lap of a 19-year-old. Some folks choose to offer partial access to an estate when beneficiaries are in their 30’s and the rest when they are older. To create a trust managed by a trustee to help your heirs, speak with an estate planning attorney who will create a sound estate plan.
If the 40% federal estate tax is repealed, Uncle Sam will need to make up that revenue gap in his budget. One proposal under discussion is a new capital gains tax for inherited assets. This could mean the Microsoft stock you bought in 1981 and passed to your heirs would be treated differently. The rules now say the cost basis for that stock would be set at the time of your death. Under the Trump proposal, the cost basis would be the original purchase price of the stock. As a result, your heirs would be looking at a huge tax burden which could be just as much as the current 40% tax.
It’s going to pay to rely on an experienced estate planning lawyer to keep you up-to-date with wherever the legislation goes. It is also important to note that 18 states and D.C. will still have their own estate tax laws. These thresholds may be even lower than those set by the federal government.
Regardless of what happens to the federal estate tax, you’re going to want to sit down with an experienced estate attorney who can review your own situation, from finances to family dynamics and create all of the documents needed, from wills to power of attorney to trusts, if appropriate, to minimize your heirs’ tax burdens and control how specific assets are distributed.
Reference: Forbes (March 23, 2017) “Do You Still Need An Estate Plan If There Is No Estate Tax?”