Estate Tax Changes

May 3, 2017

Estate Tax Changes

Our colleagues in the estate planning business have reported the rumors and rumblings coming out of Washington DC. The Republican Party has long held the repeal of the “Death Tax” as a part of the policy platform. With the turmoil created by the March 24th withdrawal of the healthcare vote, much is in question, but if tax reform does come to the House and Senate floors, there is a good chance that changes to the estate tax could be a part of the vote.

What might this look like? Speculation is that the current estate tax would be replaced by a Canadian-style capital gain tax due at death on any amount beyond the lifetime exclusion. If the exclusion was set at $5 million, then the tax would only be due if the decedent’s taxable estate was in excess of this amount. This might then produce a capital gains tax of 20% beyond this amount. Under our current income tax code, capital gains taxes for those with taxable income above $470,000 is 20% plus an additional 3.8% levied under the Affordable Care Act on gains above $250,000 ($200,000 for single filers). Whether this additional tax gets repealed is in doubt, given the March 24th turmoil.

Considering the various possibilities, the effect of these speculated changes would be to reduce the estate tax burden by nearly half. The only catch is that marriage exclusion may not survive. If it does not, then this capital gains tax would be payable on the estate of the first spouse to pass, and that could be significant for some taxpayers.

For example, a couple with a combined taxable estate of $20 million would have a tax due on the estate of the first spouse of $1,190,000. If the survivor’s estate is also then taxable at $5 million, an additional $1,190,000 would be due on the survivor’s passing. Contrast this with the $4 million that would be due on the passing of the survivor under the current law.

Bottom line, the best advice we have been given is to be patient and see how the changes evolve. For those of you with a liability under the current law, continuing to use your annual exemption probably makes sense, as long as you are completely financially secure. The annual exemption allows each of us currently to give $14,000 a year to any individual without paying gift tax. This is a “use it or lose it” exemption and does not rollover into future tax years. The gift and estate taxes are currently unified, meaning that the tax is due regardless of whether we make the gift during our lives or at death. Though this tax can be a significant impact, more than 99% of all estates are not large enough to be subject to the tax. So if you are subject to it, please celebrate your good fortune while we work with our colleagues to minimize its impact.

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