Change to the federal tax code is always a hot topic and it is gaining steam right now. It’s clear that a goal of President Trump will be elimination of the estate tax. Some refer to it as the “death tax”. President Trump, and others, argue it is unfair. For the very wealthy, income gets taxed once during life and a second time at death. It is a tax on success. Others counter that the estate tax hits only those who can most afford to pay. The wealthy have means to get sophisticated planning. The revenue earned from the estate tax might be used productively to help everybody.
I’m not so concerned with the policy arguments for now. I’ll let the politicians sort that out. The focus of this article is how removal of the estate tax will impact estate planning. What will individuals need to consider? How will estate planning attorneys respond?
To know whether the estate tax is something you need to consider, it helps to understand in a nutshell how the exemption works. Here is an over-simplified idea of the exemption concept. Right now, there is an exemption for nearly five and a half million dollars. In other words, a single individual that dies this year can leave that amount of money without being taxed. Considering most recent fluctuations, the exemption is at the high end.
Estate tax rates gouge those estates that get taxed. The choice is give forty percent of the excess to the IRS or consider some strategies. Plans often involve a will, trusts, investments products, and gifting. Approaches that only serve to reduce estate value would be unnecessary with no estate tax.
A common assumption then is that there will be big changes in how a will, trust, and estate lawyer gives advice. My prediction is the exact opposite. I see a few reasons for this forecast.
To start, the estate tax is already a non-factor for most. Legislation cutting the estate tax will not change anything for these people. Clients that do have significant wealth will still want to see it passed down in an orderly way. That is, there are many planning needs that are not tax motivated. Would you want your 21-year-old child to receive a large sum of money all at once? Do you want your loved ones to spend a year or more in the probate court? Is there a business that will continue? Do you want a charity, special needs individual, or future generations to benefit? These are serious questions outside the world of tax. There are plenty of other examples.
Also, where will the estate tax be in ten years? Nobody can honestly answer that question. Avoiding tax planning now might mean overhauling documents in the future.
It will be interesting to see how President Trump’s proposal develops. Some certainty on the future of the estate tax would be great but don’t expect it in the short-term.