There has been a good deal of talk lately about changes to the tax laws, with the primary purpose of closing loopholes and having the wealthy pay more in taxes. Two proposals, if enacted, could have serious consequences for people who are engaging in estate planning.
One proposal being touted is reducing the federal estate tax exemption, which is currently $11.7 million per person. Several years ago, the exemption was only $3.5 million, and then it subsequently was increased every year. Where the exemption will wind up is unclear, but it seems very likely that the exemption will be reduced. What does one do to avoid or minimize the estate tax? Clearly, estate planning is key. One should take the time to look at the value of their assets and to review the wills they have, to make sure that credit shelter trusts are incorporated into the estate plan. Additionally, if one is comfortable making outright gifts, or creating irrevocable trusts to gift assets to, it would make good sense to do that now, before the exemption is reduced. For example, if one were to gift $3 million away today, there would not be a gift tax, and it would greatly reduce the size of one’s taxable estate.
Another proposal, which would have dire consequences, is to eliminate the step-up in the cost basis of assets at death. Currently, if one bought stock 20 years ago, for $10 per share, held it until death, and at death it was worth $200 per share, the decedent’s heirs would inherit the stock at the $200 share value, which means if they then sell it, they would be avoiding tax on the $190 per share gain. This is has been a great way to pass on one’s wealth and avoid capital gains tax while alive. While this proposal would have serious adverse consequences to taxpayers, it would also very likely great an administrative nightmare for the taxing authorities. In 2010, for example, the estate tax was essentially eliminated (for one year), but if one died that year, the heirs did not get a step up in the basis. The problem is that the heirs would need to file a tax return showing the cost basis of the decedent’s assets–at the time they were obtained. Consider how difficult, if not impossible, it was then to obtain the cost basis of a stock or mutual fund was purchased 20 years ago. The IRS similarly had a problem in determining this figure, and no real way to verify the cost basis provided on the return. So while this proposal would yield a lot more tax dollars for the country, it would also cause a great deal of confusion and would be another administrative nightmare.
The best thing one should do at this point is not to panic; rather, one should review their estate plan to see if there are any changes which should be made at the present time. Once it becomes clear what tax changes will be adopted, then it would make sense to move forward more aggressively with modifying it in accordance with actual tax changes.
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