As everyone is probably aware, part of the tax reform proposal before Congress is the repeal of the federal estate tax. Clearly, it is not known if the estate tax repeal will in fact happen, but if it does, it will occur gradually. What does one do in the interim?
Clients should not postpone their estate planning or even undo any estate planning they have already undertaken, on the assumption that the estate tax repeal will occur. For one thing, if one passes away before the tax is repealed, assuming it is, then one’s heirs may wind up paying a very sizable estate tax, which might have been avoided with proper planning.
Moreover, most states have their own estate or inheritance tax, sometimes referred to as a death tax. While the tax rate at the state levels are usually not as high as the federal rate of 40%, the tax liability can still be substantial. It is quite clear that the states which have their own tax are very unlikely to repeal their tax as it provides a much -needed source of revenue. Even if the federal estate tax is repealed, one still needs to engage in estate planning unless one wants their heirs to pay a tax which might otherwise have been avoided. Currently, in New York, an estate can pay the estate tax at a rate as high as 16%. Other states have similar rates of taxation. Unlike the federal estate tax scheme, none of the states permit one spouse to preserve the unified credit for estate tax of the first-to- die spouse unless that spouse establishes a credit shelter trust or provides that assets bypass the other spouse. Therefore, it is essential to do proper planning.
Lastly, regardless of the tax aspect, clients should still have wills or trusts prepared, in addition to health care proxies, living wills and powers of attorney. They should also periodically view their financial situation to assess if there is an estate tax problem and to make sure that their assets pass the way they are intended to.
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