Estate tax to stay or go? Who cares?

December 13, 2017 - Posted by: admin - In category:

taxes - No Responses

As of this morning, the word out of Washington is that the Republicans in the House and the Senate have agreed on a deal for tax reform. We should know more details in the coming days. The fate of the estate tax is still among the unknown points, but many believe that the estate tax will remain in place with doubled lifetime exclusion amounts. Until we see the final bill, approved by the House and the Senate and signed by POTUS, anything can happen. Even so, my view is that almost nobody should care either way. Why? Because under the current federal tax code (i.e., before any tax reform legislation), so few Americans are subject to the federal estate tax that is mostly meaningless.

Depending on what statistics you choose to believe, perhaps as few as .02% of Americans are subject to estate tax under current laws and regulations. Then, if we look at the doubling of the lifetime exclusion amounts to about $11 million per person, adjusted each year for inflation (and assuming the continuance of portability), at very least, that number should decrease to no more than .01% and most likely, it is significantly less than that. So whether we are eventually dealing with one-hundredth of one percent of Americans or no Americans being subject to estate tax, the overall net effect on you and me is as close to zero/nothing/nil as I can conceive. This seems somewhat like hearing that the world’s leading manufacturer of 200-foot luxury yats has announced a 25% price increase. Maybe akin to learning that the sticker prices for the Cessna Citation Longitude and the Gulfstream G650, both ultra luxury and uber expensive jets, have increased significantly as of January 1, 2018. To you, me and approximately 99.99% of Americans, these things just don’t matter.

I will add the same caveat that I often discuss with my clients in this same context of the federal estate tax–the fact that none of this is Constitutional and, instead, it is wholly statutory. This is significant because there is nothing that prevents Congress from passing the Tax Cuts and Jobs Act Monday, sending to POTUS for his signature on Tuesday, Donald signing into law and Congress amending or repealing on Wednesday. Nothing. Maybe you are thinking about the idea of the Republicans putting words like “permanent,” “irrevocable,” “forever” and words like that into the new legislation to prevent such a short-term about-face. Well, that’s a nice idea and one that has been attempted in the past, including in the context of the federal estate tax, but it doesn’t work. Generally (if not universally), legislation that is written and passed by the U.S. Congress is always subject to further amendment and change in the same manner as it was originally promulgated (i.e., debates and majority votes). My point is that while the federal estate tax may continue to be something of a far-off and inapplicable concern for almost every U.S. Citizen as long as the current tax laws remain in place, there is nothing that prevents Congress from changing its collective mind tomorrow and taking the lifetime exclusion amounts back down to 2001 or 1970 levels.

So get comfortable with the current federal estate tax landscape and unless you have many millions in the bank and on the financial statement, know that you likely don’t have to worry about the federal estate tax for the time being. But pay attention to these types of “tax reform” legislative parties, which happen every decade or so, because you just never know what may come out of such gatherings of elected officials.

Finally, please do NOT make the mistake of assuming that because federal estate tax is not applicable to you, there is no reason to worry about estate planning. This incorrect association of federal estate tax and estate planning generally is one of the most common myths and misconceptions related to estate planning. Estate planning for most people is about things like probate avoidance, providing for an orderly distribution of assets (great or small) to heirs on their own terms (rather than letting someone else decide) and preserving step-up in basis on appreciated assets.

So again, enjoy the discussion about the changes to or perhaps eventual repeal of the federal estate tax, the hated “death tax,” but remember that it is mostly a trivial matter for 99.99% of Americans.

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