If you are considering updating your estate planning documents, you may want to look at the candidates’ Estate Tax proposals.
Talk of increasing the estate tax can generate strong feelings among voters. In actuality the federal estate tax affects only 0.2% of the United States population. With the current exemption set at $5.45 million per person, only two of every 1,000 Americans who die in 2016 will have estates large enough to pay estate tax.
The Candidates’ Estate Tax Proposals
Clinton and Trump have both put forward proposals to change the current estate tax laws. Whether the next President can get these plans passed into law remains to be seen. However, many estate plans will need to be updated if either of the proposals becomes law. Here is what the plans look like side-by-side:
If your estate is less than $5.45 million, and the exemption amount is lowered (Clinton’s plan), you may need to amend your Will or Trust or transfer assets during life to minimize the future estate tax bill. Most taxpayers will not have to worry about a tax rate of 55% if Clinton’s proposals are enacted, but it will be important to know if your estate will exceed a lower exemption amount in the future. Your attorney can help you evaluate your risk and revise your planning documents to keep your Estate’s tax obligations low and take advantage of techniques available to preserve your assets for your loved ones.
If the Estate Tax is eliminated as Trump proposes, and you have complex tax saving plans in your documents, your beneficiaries could find themselves living with unnecessarily burdensome trusts. Elimination of the estate tax could provide a good reason to simplify a complex plan. With such widely different proposals, what is the best course to take?
The best plan of action at this point is to consult with your attorney to assure that you are prepared for either eventuality. After all, taxes are not the only consideration in estate planning. You may not need a trust for tax purposes, but there are other benefits to trusts. Your estate planning attorney can set up a private estate plan with built-in flexibility to accommodate changes in the tax laws.
If you were counting on the current laws regarding cost basis and capital gains tax consequences to keep the cost of transferring assets low, you may need to reconsider. There is one similarity between the candidates’ proposals, both Clinton and Trump propose significant changes in how capital gains are taxed upon your death. Depending on the nature of the assets, these changes can have greater impact on your beneficiaries than the Estate Tax provisions themselves.
Currently, the tax basis of inherited assets is “stepped-up” to the fair market value of the asset at the deceased person’s date of death. The capital gains tax applies to the difference between the value of an asset at date of death and the value at time of a subsequent sale. This method of calculation dramatically decreases capital gains tax paid by beneficiaries.
Clinton’s proposal regarding cost basis would make the inheritance a “realization event.” The capital gains tax would be calculated on the decedent’s cost basis and would be due at time of inheritance by the beneficiaries. Trump’s proposal would exempt the first $10M in inherited assets from capital gains taxes, with the remainder being subject to the tax.
While the outcome of the election is unknown and the future of these tax proposals is uncertain, don’t let that keep you from making plans now. Consult your Estate Planning attorney and be sure you are taking current and possible future tax laws into account. After all, we make these plans to preserve as much of our assets as possible for our loved ones. Take action to make sure that your plans are structured to do just that.