The Estate Tax began in 1916, with Congress passing The Revenue Act of 1916, which not only introduced the modern-day income tax, but contained an estate tax with many same features we see today. However, there are differences between that rule then and the rules today. In 1916, the first ($50,000 of wealth was exempt from estate tax. $50,000 in 1916 is equal to more than $11 million today). The tax rate was appreciably different as well. Tax rates started at 1 percent and climbed to 10 percent for estates over $5 million (that’s $1 billion today).
According to an article in the Wall Street Journal, a tax repeal seems “virtually certain” although there is no such thing as 100% certainty of anything especially when it involves the U.S. Congress. If the current estate tax is repealed, it will give a hefty tax cut to the wealthiest millionaires and billionaires.
It’s a little less clear what may happen to the gift tax. The gift tax applies to transfers during one’s lifetime and to an income-tax provision known as the “step-up,” which allows assets held at death to bypass capital-gains tax. This applies to all assets (except not-yet-taxed retirement funds), even those that have been held for years and are highly appreciated. Trump’s proposal looks to eliminate the step-up above an exemption of up to about $10 million. Beyond that, the deceased’s cost of the asset (the starting point for measuring capital-gains tax) would transfer to the heir.
With these uncertainties, here are a few planning tips:
Sign a will. It’s important to have a valid will, and if you’re concerned about what Congress will do, think about adding in flexibility, like allowing an executor or trustee latitude to make changes.
Temporarily avoid taxable gifts. Don’t make irrevocable moves that risk being subject to gift taxes, unless there is an important rationale, like transferring shares in a company that is about to go public.
Ease up on discounts. Early on in 2016, the Treasury proposed to curb “valuation discounts,” which are applied by the wealthy to lower estate and gift taxes. These regulations are not expected to survive.
Timing. In the past, some estate tax changes have been retroactive and some not, so it’s difficult to say what Congress will do. It is also not apparent whether any of the changes will be permanent or will expire at some point. As a result, there may be continued uncertainty, even after Congress acts.
We can help you sort all of this out. With no estate tax to plan for, there are myriad new ways to design your estate plan to avoid income tax traps for your heirs. Why not give us a call at 757.259.0707 or request a complimentary consultation online.
Reference: The Wall Street Journal (December 9, 2016) “Strategies for Playing Trump’s New Estate-Tax Plans”