Many people have heard the old adage, “There are only two things that are certain in life: death and taxes.” Both of these certainties have probably caused each of us some concern at one point or another during our lives. Many of the clients who I have the pleasure to work with are particularly concerned about the federal estate tax. One of the most common questions that I get asked is, “How much are my children going to have to pay in taxes when I die?”
Currently, the federal estate and gift tax (sometimes referred to as the “Death Tax”) is imposed on transfers made during life and at death. The estate and gift tax is a unified tax, meaning that the value of gifts made during life are combined with the value of transfers at death to determine whether any tax is due. The current federal estate and gift tax exemption amount in 2015 is $5.43 million. Any assets transferred in excess of the exemption amount, either during life or at death, are taxed at the rate of 40 percent.
Recently, an attempt to repeal the Death Tax has gained a lot of publicity. On February 26, 2015, Representative Kevin Brady introduced the Death Tax Repeal Act of 2015 in the House of Representatives. One purpose of the bill is to repeal the federal estate tax for decedents dying after the bill is enacted. The bill would leave the gift tax intact but reduce the top gift tax rate to 35 percent. The bill passed the House on April 16, 2015. South Dakota Senator John Thune introduced an identical bill in the Senate on March 25, 2015, which the Senate then referred to the Committee on Finance.
Many commentators feel that it is unlikely that the Death Tax Repeal Act of 2015 will become law. The President has proposed a very different course of action for the federal estate and gift tax, which includes decreasing the exemption amount and increasing the tax rates. In the Administration’s Fiscal Year 2016 budget proposal, the President proposed to restore the estate and gift tax parameters to those in effect in 2009 ($3.5 million exemption for estate tax and $1 million exemption for gift tax). The proposal would also raise the top estate and gift tax rate to 45 percent.
While the future of the federal estate and gift tax remains unclear, one thing is certain: the need to plan. The Death Tax can certainly be a motivator to plan if you find your net worth creeping toward or exceeding the exemption amount. However, according to an article published by the Joint Committee on Taxation on March 16, 2015, entitled, “History, Present Law, and Analysis of the Federal Wealth Transfer Tax System,” very few estates will have a federal estate tax liability. According to the article, in 2013 there were 2.6 million deaths in the United States, and of those deaths, only one-fifth of one percent of those decedents had a federal estate tax bill.
Even though the vast majority of us will not have a federal estate tax bill when we pass away, planning is important for many other reasons depending on your goals, such as avoiding probate, planning for disability, appointing guardians for minor children, creating divorce protection and creditor protection for the inheritance you leave your children, and creating a succession plan so that your family business can continue with the next generation, just to name a few. Try not to let the fact that your children may not have a federal estate tax bill lull you into inaction.
*As seen in Dakota Farmer
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