The estate tax on assets being transferred between generations kicks in when an estate exceeds $5.49 million in value or a married couple's estate exceeds $10.98 million. The tax, sometimes derisively called “the death tax,” maxes out at 40 percent upon the owner’s death.
Since your high-net-worth clients’ estates may fall above this threshold, you should know that under the tax reform plan proposed by the House of Representatives, the estate tax would be eliminated after 2024. The Senate version of the bill preserves the tax but doubles the amount your clients could shelter from the federal estate tax, meaning a couple could shelter $22.4 million in 2018.
Opponents of repeal say the estate tax fairly taxes the rich. Proponents say the tax places an unfair burden on inherited family businesses. Treasury Secretary Steven Mnuchin recently pointed out in a speech at the Institute for International Finance that many taxpayers pay significant portions of their income to the government during their working lives and shouldn’t have to pay another large portion when they die. He also admitted that repeal of the estate tax would disproportionately help rich people.
With all the political maneuvering surrounding the estate tax, one planner says he isn't betting on any outcome.
“The estate tax is, and has always been, a moving target for most of our clients,” says Bruce Primeau, a CPA with Summit Wealth Advocates in Prior Lake, Minn. “For the most part, our highest-net-worth clients aren’t making any major moves or changes to their estate plan based on what Congress or the president are proposing, as we feel the moving target game will likely always be the case, depending on which party is in office. I tell clients that nothing is ever permanent when Congress is involved and typically recommend they not make many irrevocable decisions.”
Most HNW clients are skeptical about the likelihood of an actual repeal of the estate tax, “although many believe that, politically, the proposed increase in the exemption is realistically possible, since it will further reduce the number of middle-class people who are subject to the estate tax, generally a Republican goal, while retaining an estate tax on the ultra-wealthy, generally a Democrat goal,” says Marvin D. Hills, CPA, partner and private client services leader in the South Bend, Ind., office of Crowe Horwath LLP.
There are many tactics to mitigate the existing state tax, including donating to charity or transferring small amounts of money to the next generation tax-free. More complicated maneuvers for high-net-worth clients can also involve trusts, life insurance and other strategies.
Potential changes in the estate tax and stepped-up basis is “being bantered back and forth and, from what I gather, if they were to do away with the estate tax they would not likely allow for the step up in basis at date of death,” Primeau says. “While this makes sense in theory, what it means to me is they’ll gather some tax dollars from those looking to liquidate a loved one’s estate after they die. In effect, there will be some form of death tax--it’ll just be in the form of tax on the gain on liquidation of one’s estate.”