Don't wait until it's too late for estate tax reform

June 30, 2017

By Randy Mihm, CPA, JD

One of the key components in the Trump administration’s tax reform plan is the elimination of the estate tax. While this may have been a hot topic on the campaign trail, and has been for several campaign cycles, it is important to recognize that some form of estate tax has existed since the 1930s and is therefore unlikely to be dissolved completely. Both federal and state governments are continuously searching for revenue, making the odds of a complete repeal of the estate tax slim.

Currently, an individual can pass $5.49 million on to their heirs ($11 million as a couple), by lifetime or death-time transfers, free of estate tax. However, after that threshold has been met, the current federal rate is 40 percent and is due within 9 months from the date of death. Put simply, if the lifetime exclusion has been fully used by lifetime gifts, and there is $1 million remaining in the estate at the time of death, at a 40 percent taxable rate, taxes take $400,000 and heirs are left with $600,000, barring any additional state inheritance taxes. The burden of this only continues to grow the larger the estate, and it becomes easier to see why developing a strategy regardless of current estate tax rate becomes crucial to protecting your legacy.

It is unwise to wait around for a change to happen as delaying could literally cost you millions, and it is never too early to start this process. In fact, there are some actions that are better done, sooner rather than later, particularly for those who own a business or real estate:

Be sure your business is structured correctly. The structure of your business can have an impact on how it is valued and how it is transitioned at the time of death or before.

Plan for business transition. Whether a family member, employee or third party is expected to take over the business when you retire, it is prudent to establish your succession plan sooner rather than later. This allows the successor more time to plan and lay the foundation for how they will acquire the company. Additionally, you gain peace of mind knowing a plan is in place should an unexpected event occur and force an earlier transition.

Bring in the family early. It may be prudent in specific cases to bring any family you were planning on including in the business sooner than you originally anticipated. You may have multiple children with stakes in the company, but establishing the lead successor earlier will set the stage for a smoother transition on a personal and business level.

Establish a family limited partnership (FLP). An FLP has a series of advantages in appropriate situations. First it helps you give away small parts of a property which may be difficult for direct transfers. For example, it is difficult to give away one acre of a 100 acre parcel, but with an FLP you can transfer 1 percent of the units of an FLP holding of a 100 acre parcel of land. Second, certain valuation discounts may apply in determining the value of a non-controlling interest in an FLP. These can have the effect of reducing the estate tax. Third, an FLP may allow for the properties contributed to the entity to be managed as a unit rather than separately by the recipient family members.

Create a revocable or living trust. A revocable or living trust allows you to transfer assets during your lifetime and perhaps avoid some complexities and costs of administration at death-time.

Set up a gifting plan. Individuals may gift up to $14,000 annually without tax or the use of a lifetime unified credit. This allows you to transfer more of the estate directly to your heirs without the penalty of the estate tax and does not affect your unified credit.

Establish your charitable intent. Charitable giving is an impactful and effective way to distribute your wealth without enduring a major tax burden, while serving a cause of which you are passionate. Determining your charitable goals early will ensure your wishes are met when the time comes to pass on the gift.

Do not wait until it’s too late by anticipating major tax reform. These tips only scratch the surface on the considerations that should be made during the estate planning process and are a starting point to establish your overall goals and methods for reaching them. Developing a comprehensive estate plan takes commitment and due diligence, and a well-done plan should be flexible enough to cover all your wishes regardless of political climate. Political policies and life expectancies can change overnight; being proactive in developing your estate and succession plans early provides clarity and peace of mind.

For more information or assistance on tax planning and preparation, call 888-556-0123, email or submit our online form.

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