Bitterly referred to by many as the “death tax”, the federal estate tax applies to transfers of wealth when a person dies. And because of its effect of charging an additional 40% tax to the assets of an estate that were likely already subject to income tax while the owner was alive, the estate tax is also viewed as a “double tax”. As a result, the estate tax was highlighted during the 2016 presidential campaign and remains an item for possible action by the Trump Administration.
What many do not realize, however, is that the estate tax is paid by an extremely low amount of estates. According to the Tax Policy Center (http://www.taxpolicycenter.org/briefing-book/how-many-people-pay-estate-tax), only an estimated 10,900 estate tax returns were filed in 2016, of which an estimated 5,200 were taxable. The projections for 2017 look very similar, and going by typical estimates of how many people die per year in the United States (i.e. 2.5 million to 3 million), less than 1 in 500 people who die this year will have any estate tax liability. Those statistics beg the question of what makes an estate “taxable”? In 2017, a single deceased person’s estate would need to own more than $5.49 million in gross assets. This number is referred to as the estate tax exemption, and married couples can essentially double that number when considering how much of their assets will be shielded from the estate tax.
Accordingly, the answer to the question first set forth above is pretty simple – it will mean very, very little to most people if the estate tax is repealed. And if you live in Michigan, more good news – the state eliminated its own estate tax in 1993 (although 18 other states still have such a tax), so the federal estate tax is the only one to worry about, if at all.
I imagine that some people reading this article will be surprised to know that the federal estate tax exemption has reached such a high number, as only 12 years ago, the same exemption was a mere $1.5 million. Factoring in death benefits from life insurance, retirement account balances, the proceeds from selling real property, and other assets, getting to that number was not all that unusual for many people.
Still, from a modern estate planner’s perspective, we usually recommend focusing in your planning on the single exemption amount of $5.49 million, as utilizing the full $11 million requires the filing of an estate tax return, which can be costly and has a hard deadline mandated by the IRS. Additionally, the exemption amount can be further reduced during a person’s life by gifts exceeding the annual exclusion amount (currently $14,000 per recipient). But with this high exemption amount, there may be a good opportunity to simplify your estate plan if it previously included additional details and structure to avoid the estate tax.
If you have questions about this issue or would like assistance to evaluate simplifying your estate plan, please let me know.