By: Martin M. Shenkman, CPA, MBA, JD
Do we still have an estate tax? We might not by the time you read this. But, more likely than not, the federal estate tax will not be repealed and many states have and will retain their estate taxes.
Some estate tax proposals would exclude $5 million from estate tax for each person, and let the surviving spouse use any remaining exclusion from the first to die spouse. This would be an effective $10 million in assets that could pass free of federal estate tax without even requiring a bypass trust (credit shelter) under your will. The rate was proposed to be reduced on estates of $25 million or less to the same rate as capital gains tax, currently 15% (scheduled to increase to 20%), and double that on larger estates (which is still much less than the current rate). Whether this bill or some variation passes, bear in mind that estate planning is much more than saving estate taxes if done properly. Effective estate planning is never one-dimensional. It requires addressing asset protection (especially if you are self employed or a professional whose assets your clients might try to reach if they sue you, i.e., doctors and lawyers), coordinating insurance and investment planning, succession planning for a business or professional practice, influencing how your heirs will use the money, protecting loved ones (particularly if you are in a non-marital relationship with your significant other, for example, same-sex couples who are not permitted by law to marry), income tax planning, and much more.
Much will change, but the need for planning will not. Example: If your estate is not taxable for estate or GST purposes, you could bequeath all assets into a dynasty trust to protect them from any future estate or other tax, save state income tax, protect assets from heirsâ€™ divorce and creditors. This type of planning remains limited because of the costs of the Generation Skipping Tax. Lifting that burden means more planning, not less. More benefits, not just less tax. Powers of attorney often had elaborate gift provisions. Eliminating them might harm your heirs in the event of your disability, so simply deleting those clauses because of the inapplicability of a tax advantage could be a huge mistake. Thoughtful planning will remain important.
Even if the estate tax is repealed, it will not simultaneously repeal our litigious legal system, so protecting assets will remain a priority. That means trusts will continue to be the vehicle of choice for gifts and bequests, but they will be modified to address the new tax landscape. Consider the following: if the estate tax wanes, might the government re-emphasize income tax increases to raise revenues? If so, family partnerships and LLCs will have a different focus. Forward thinking taxpayers will lay that ground work now.
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