Everyone is worried about taxes, and especially paying too much taxes. However, a tax that many people do not worry about is the federal estate tax as it usually only impacts less than 1% of families. For those of you who are new to the concept of the federal estate tax, this is a tax that is assessed against the value of your assets that you own at your death (including life insurance death benefits). For estates above $5.45 million, the top tax rate is 40%. However, between married couples, the estate tax may only be levied for those estates above $10.9 million. Therefore, many families do not have the estate tax to worry about.
However, could this be changing?
During the 2016 election, each candidate had different points of view when it came to the direction of the country. One was on the topic of taxes. Hillary Clinton's campaign included a proposal to reduce the estate tax exemption. Hillary Clinton's proposal included reducing the federal estate tax exemption from $5.45 million to $3.5 million. Although, Secretary Clinton indicated that portability would remain and the unlimited marital exemption would remain (allowing a spouse to leave an unlimited amount of assets to a surviving spouse while incurring zero estate tax liability), Secretary Clinton's proposal indicated that the Gift Tax exemption would only be $1 million over a lifetime, as opposed to being in line with the federal estate tax. Finally, Secretary Clinton's proposal indicated a desire to raise the top estate tax exemption to 65 percent.
Donald Trump's estate tax proposal was much different. Trump's proposal included a complete repeal of the federal estate tax. However, the concept of your heirs receiving a stepped-up tax basis would be repealed for purposes of calculating capital gains taxes. For example, if you bought stock in ABC Corp. in 1990 for $25 and in 2017 it is worth $1,000, then you would pay capital gains tax on the $975 gain. However, if you pass this asset at death in ABC Corp to one of your heirs in 2017, your heirs receive a stepped up tax basis to the date of death value ($1,000). This means that your heirs could sell the stock in ABC Corp for $1,000 and not pay any capital gains taxes. However, under Donald Trump's tax proposal, the stepped-up basis rules would go away and your heirs would have to pay capital gains taxes.
In 2015, Less Than 1% Paid Any Federal Estate Tax - So Why Do I Care?
At the present time, neither of these tax proposals have been enacted into law, the stepped-up basis rules still exist and the federal estate tax exemption is at $10.9 million for married couples and $5.45 million for single individuals. So, you may be asking yourself, why do I care?
In 2014, the IRS collected $19.3 billion in the form of federal estate taxes. That may seem like a lot, but that only accounts for 0.6% of all the taxes collected by the IRS in 2014. The largest was individual income taxes at 46.2% of the total amount of tax collected.
However, here is why you should care ... As of the time I am writing this article the total national debt is $19,973,979,152,032! Also, by the time I finish writing this article, the national debt will most likely exceed $19,974,000,000! This is a debt, just like any debt, that will eventually have to be repaid! We have all heard the rumblings in Washington about the Debt Ceiling and that the debt is reaching historically high levels. As I said above, the federal estate tax only accounted for 0.6% of all tax collected in 2014. In addition, the $10.9 million estate tax exemption is historically high and has not been at this level since its inception over 100 years ago. Therefore, one can assume that the estate tax exemption will be lowered in the future and more will be paying the estate tax to service this historically high debt!
If you ask yourself, where will the U.S. Government obtain the money to service not just the interest on the $19 trillion debt, but also the debt itself when eventually the government will have to pay ... the easy answer is with taxes, and the federal estate tax collected in 2014 was only $19.3 billion! That is a drop in the bucket when you are facing over $19 trillion in debt with the estimated interest being paid on this debt of over $2.5 trillion!
Will either of these two tax proposals be passed into law? As with many questions regarding law, only time will tell. However, it appears more and more likely that to service the $19 trillion debt and the interest required to service that debt, that increasing taxes will be an easy solution, and raising the estate tax (or passing legislation which makes more people liable for estate tax) would be another easy solution to the U.S government debt exceeding $19 trillion!
The Time for Planning is Now!
Even in today's favorable estate tax regime, many taxable estates do not pay any federal estate taxes. This is because they become educated, speak with knowledgeable estate planning and tax planning attorneys and experts, and utilize some of the many tax savings strategies including: QTIP Trusts, Private Foundations, Public Charities, Charitable Lead Trusts, Charitable Remainder Trusts, Grantor Retained Annuity Trusts, and Qualified Personal Residence Trusts.
Do not wait until it is too late! If this article has caused you any concern, please contact our office at (615) 472-2482 to schedule an initial consultation to discuss the planning options you have to keep your wealth in the family and out of the government!
As always, we are here to help.