Lawmakers love to talk about dismantling the federal estate tax, because they get a good response from voters. However, few Americans actually pay the federal estate tax, with most who might be eligible using smart estate planning to avoid it.
The popularity of eliminating the federal estate tax always makes big headlines, and now that the White House and Republicans have released their tax reform plan, the “death tax” is in the news again. However, according to a recent article in The Motley Fool’s recent article, “3 Reasons You'll Still Need Estate Planning Even if the Death Tax Disappears,” everyone still needs an estate plan, regardless of what happens to the federal estate tax. Here’s why.
Direct your assets where they're most needed. The most obvious reason: to direct the disposal of assets after your death. You’ll want to protect minor children with trusts to guarantee wise financial management of their assets after your death. If you’ve been married multiple times with children from different marriages, you also need to really get a grip on estate planning to avoid any problems before they arise.
A few states still have estate taxes. Tax reform will address federal law, but the federal government doesn't have power over how states tax their residents. The majority of states don't have an estate tax, but 14 states, plus DC do. Six states also have inheritance taxes that apply to the recipients of gifts. Of the states that have their own estate taxes, the exemption amounts are often much lower than the federal exemption of $5.49 million. Therefore, more people should plan their estates with state estate taxes in mind.
The need for federal tax planning won't disappear. Right now, the trade-off that taxpayers receive is this: in exchange for potentially being subject to estate tax, you have a step-up in the tax basis of inherited assets, which eliminates capital gains tax on any appreciation the prior owner earned before death. If the new legislation for eliminating the estate tax also has a cut to the step-up in basis, it would require heirs to take capital gains tax liability into account. This would create a much more difficult burden on heirs to account for the tax basis of the deceased person from whom they received the assets.
Estate planning protects you and your family. Certain documents that are part of estate planning, including your will, Power of Attorney and Health Care Proxy among others, need to be in place, regardless of federal or state tax changes. By having a plan in place, your family will be better prepared for your passing.
Reference: The Motley Fool (October 21, 2017) “3 Reasons You'll Still Need Estate Planning Even if the Death Tax Disappears”