Been working with a New Madrid family that has worked hard over the last several decades and have accumulated an estate that is likely to cause there to be federal estate tax when they die. They were anxious to determine what needed to be done to reduce the ultimate federal estate tax burden.
We had a fairly in depth discussion about the pros and cons of annual gifting to their descendants – and perhaps even the spouses of their descendants. In particular, they wanted to know if they could back-date transfers so that it would appear that the transfers were made last year – enabling them to reduce the value of their estate even further.
I hated to burst their bubble, but I had to be the bearer of bad news. They could not, this year, do transactions that would appear to have been made last year or the year before. They thought, just maybe, that if the check was dated last year, that would be OK even though the check was deposited by the donee until this year.
That’s why it is so important that you get the education you need so that you can take advantage of tax reduction and other estate protection techniques that can be taken advantage of if you act early in the process.
Perhaps you are wondering, “What are the differences in the estate tax proposals for Donald Trump and Hillary Clinton?”
In its current pre-election form, an estate must pay federal estate tax if the estate has a net fair market value in excess of $5.45 million as of the date of death. The estate tax rate is 40%. Married couples can use certain estate tax planning legal strategies (such as the unlimited marital deduction and portability) to protect $10.9 million from the estate tax.
The Donald Trump Estate Tax Proposal
Well, it’s pretty simple. Donald Trump proposes eliminating the estate tax.
There are many benefits that both the government and the people recognize from a tax system that does not tax fair market value of assets as of date of death:
- It’s Complicated. The federal estate tax is one of the most complicated taxes in our American system. Simply preparing an estate tax return after the death of someone who had a “taxable estate” is one of the most difficult exercises any person or tax preparer can go through. And this tax return (with the corresponding tax) is due to the IRS within nine months from the date of death. Government will be bigger with an estate tax due to the complexity required to monitor and enforce the estate tax.
- It’s Burdensome on Families. So, with our current estate tax system, you’re often forcing surviving family to rush to sell real estate, farms, and businesses at less than fair market value in order to pay a 40% tax that is based on the value of the assets as of the date of death.
- It’s a Small Portion of the Budget. The federal estate tax that the IRS collects represents a miniscule portion of the overall taxes that the government collects. Face it – the IRS gets its money from the income tax. So, why have a complicated and burdensome estate tax when it doesn’t provide significant revenue that the government would re-purpose.
- America Doesn’t Understand It. Most people don’t understand that the estate and gift tax are unified. For example, most of America thinks that somebody owes taxes on gifts in excess of $14,000 (the present interest annual exclusion). People don’t realize that no one owes taxes on gifts in excess of $14,000. When an individual makes a gift in excess of $14,000, they merely being using some of their $5.45 million estate tax exemption – which most people will never use!
- Eliminating Estate Tax Will Motivate Business Owners. Business owners who face the fact that the government will get as much as 40% of the value of their business and their estate when they die, will be less inclined to work hard, hire and pay top employees, and grow their business. A business owner who knows they can pass their business – intact – to their family will be motivated to increase the value of that business which will, in effect, create more income for themselves and thus, paying more income tax due to their successful business.
- It’s What America Wants. As an estate planning attorney, the biggest concerns that people who plan their estates have is first, they want to avoid taxes on their estate, and second, they want to avoid leaving their estate to the government – they want their family to get what they worked hard for.
- The Super Wealthy Are Charitable (And Avoiding Estate Tax Anyway). It’s been stated that the super wealthy should face an estate tax because the rich are “getting off the hook.” Well, the two richest people that I know of are not going to pay estate tax under our current system anyway. Both Bill Gates and Warren Buffett have pledged to leave their vast estates to the Bill and Melinda Gates Foundation. They will take advantage of the estate tax charitable deduction, which allows estates to avoid estate tax when the estate is left to charity. I suppose Bill and Warren feel that their Foundation can spend the money more wisely than the federal government. And I know that many other of our nation’s wealthiest taxpayers have pledged to leave their estate to charity, thus eliminating any chance that the government will collect estate tax from these folks. So, a complicated estate tax system on the super wealthy doesn’t do any good when the super wealthy are using their wealth and their smarts to avoid the federal estate tax and leave their estates to charity.
The Hillary Clinton Estate Tax Proposal
Hillary Clinton’s estate tax proposal is to increase the tax. The tax will be increased through her proposal to lower the estate tax exemption and increase the estate tax rates. She is proposing to reduce the estate tax exemption from $5.45 million to $3.5 million. And she is proposing to increase the estate tax rate from 40% to 45%.
Today, someone who dies with a $6 million estate will pay $220,000 in estate tax. Under Donald Trump’s proposed estate tax plan, that same estate would pay $0 in federal estate tax. Under Hillary Clinton’s proposed estate tax plan, that same estate would pay $1,125,000 in estate tax, and they may have to sell their business to pay the tax, perhaps eliminating jobs of those who helped the business owner who built the business.
Feel free to Comment and share your analyses of the different estate tax proposals. The estate tax has been largely kept out of the limelight in the political debate between Hillary Clinton and Donald Trump.
The simple answer has 2 parts.
Each individual has an “annual exclusion” that allows them to give $14,000 per year to any number of individuals, without paying any gift tax. That means a wealth grandmother can give her 3 kids $14,000 each and each of her 7 grandchildren $14,000 each. The grandmother could give $140,000 (or more), each year, with no IRS reporting requirements.
Keeping it simple: Annual Exclusion = $14,000 (2016)
The issue becomes for gifts above $14,000. Gifts above $14,000 begin to apply to your “lifetime exclusion”. In 2016 the lifetime exclusion is $5,450,000. That is a large amount of money and does not apply to most people. However, if you make a gift above $14,000, you must report to the IRS using a gift tax return when you made the gift and the amount of the gift so it can be deducted from your lifetime exclusion. I have yet to meet anyone who enjoys reporting additional information to the IRS. By keeping gifts to $14,000 or less and giving to multiple individuals, you avoid those reporting requirements.
Keeping it simple: Lifetime Exclusion = $5,450,000 (2016)