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The Uncertainty of Estate Taxes

Ben Franklin is credited with the quotation that “nothing is certain but death and taxes.”  But even the fate of the estate tax is uncertain.  Among the tax proposals currently being considered in Congress are efforts to eliminate the federal estate tax.  For 2017, only estates in excess of $5.49 million are subject to tax (projected to rise to $5.6 million for 2018), meaning only a few thousand estates are taxed each year.  What can you do amidst the uncertainty?

  • Watch what Congress does, not only with income tax, but also with estate tax.  If estate taxes are eliminated, some appreciated assets owned at death may be subject to capital gains tax (above a specified amount).  The gift tax, which generally applies to annual gifts in excess of $14,000 per recipient (projected to rise to $15,000 next year), will likely remain. Total lifetime gifts up to $5.49 million in 2017 are sheltered by a gift tax exclusion.

  • Currently, 18 states and the District of Columbia have estate and/or inheritance taxes.  In some cases, the taxes apply to estates that are far below the $5.49 million federal level.  Your estate plans should consider ways to reduce or avoid these taxes.  Even if your own state does not tax estates, if you own real property in one of the states that does impose a tax, you may be subject to tax.  States with estate taxes permit deductions for gifts to charity through a will, living trust or beneficiary designation.

  • If the estate tax is repealed, have your estate plan reviewed by your attorney.  Many estate plans drafted years ago have formula clauses that may be obsolete in the absence of the estate tax.

  • Income tax charitable deductions might become more important if estate taxes are eliminated.  It may be time to accelerate charitable gifts in a will or living trust to lifetime gifts, including gifts that reserve payments for life for the donor and/or spouse, while providing a current income tax deduction.

  • While IRAs, 401(k) accounts and other qualified retirement plans might not be subject to estate tax, income taxes will still apply to withdrawals by beneficiaries.  If charity is named a beneficiary, income tax is avoided on the gift portion.