One important aspect of the tax reform plan released by the White House and congressional Republicans involves removing the federal estate tax, which the plan refers to as the death tax. Estate taxes have been in the crosshairs of several lawmakers for years because many view them as an onerous form of double taxation that takes money that has already in several cases been subject to income tax.
A benefit of removing the estate tax is that it allows some individuals to simplify their estate planning, bypassing the need for complex techniques tailored to lessen a potential tax bill to the IRS.
Still no one should be deceived that eliminating the death tax will make it unnecessary to plan an estate at all. There are at least three reasons why you’ll still require estate planning even if tax reform successfully puts a stop to the federal estate tax.
- You want your assets to go where they are urgently needed
The major reason why you should still expect to plan your estate even in the absence of a death tax is to fulfil its main purpose: directing the transfer of your assets after your death. It is true that in the past, the possibility of having to settle estate tax was a huge motivator to get estate planning done sooner rather than later. However, the recent rise in the amount of money one can transfer at death without having to oat estate tax have already made potential liability a smaller factor in estate planning.
The more complex your family case is, the greater the need for a smart estate plan. Safeguarding little children often requires creating trusts to make sure that their assets are well managed after your death, while those who have married several times with children from diverse marriages need to use considerable forethought in handling estate planning in order to quell potentially volatile situations before they spring up. Not having to handle federal estate tax can make estate planning easier, but it doesn’t eliminate it totally.
- Some state will still have estate taxes
Tax reform will address federal law, but the federal government doesn’t have control over how each state decides to tax their residents. The majority of states don’t have an estate tax. However, 14 states including the District of Columbia do. Moreover, six states have inheritance taxes that apply to the recipients gifts.
Among the states that have their personal estate taxes, the exemption amounts are always much lower than the federal exemption of $5.49 million. New Jersey taxes estates as small as $675,000, while Massachusetts including Oregon have exemptions of just $1 million. Those limits are low enough that a lot of people should plan their estate with state taxes in mind.
- The need for federal tax planning won’t disappear
At last, the assumption that removing the estate tax will prevent the need for families to do any tax planning is wrong. Under current law, the trade-off that taxpayers receive is that in exchange for potentially being subject to estate tax, you get a step-up in the tax basis of inherited assets. That has the effect of preventing capital gains tax on any appreciation that the former owner earned before death.
Although the details of the estate tax elimination proviso is yet to be made available, most identical plans in the past have called for the step-up in basis to go away also. This would require heirs to take capital gains tax liability into account, and also create a much harder burden on heirs to account for the tax basis of the decreased individual from whom they got the assets.
Need an estate planning attorney?
If you need the help of an estate planning attorney to plan your estate, don’t hesitate to contact our office. Our estate planning attorneys are experienced and can help you with issues regarding estate planning, be it the setting up of estate planning documents, or providing you with valuable advice.
