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My Turn: The numbers behind the estate tax



For the Monitor
Thursday, October 05, 2017

Part of the proposed reformation of the Income Tax Code by the administration includes the revocation of the Federal Estate Tax and the Generation Skipping Transfer Tax. The tax law was liberalized in 2012 to provide that each U.S. citizen enjoys a $5 million exemption at death for each of the two taxes with an annual cost of living increase. As a result of the annual cost of living increase, the current exemption for an individual dying this year is $5,490,000 per person (or a total of $10,980,000 for a married couple). Next year it is predicted that the exemptions will increase probably to $5,500,000.

The Federal Estate Tax applies to taxable assets in a decedent’s estate, which include real estate, life insurance owned by the decedent, retirement accounts, investment assets, personal property, etc. The number of individuals dying with this magnitude of assets is very small – less than a fraction of 1 percent of decedents are required to file such a return. If there is a surviving spouse, hardly ever is a tax paid until the second spouse dies and only then if the assets exceed the exemption available to the decedent in the year of death.

With modest tax planning, an even greater amount can be transferred to the next generation without tax. For example, if life insurance is owned by the children and not the decedent, the life insurance is excluded. Another example would be the home real estate and vacation real estate owned by an Irrevocable Trust would be excluded.

And there are other legitimate ways to reduce the taxable estate such as the Annual Gift Tax Exclusion of $14,000 (next year it will be $15,000), which can be given as many individuals as you wish regardless if family members or not. In addition to the $14,000, a person can pay the tuition of a child (or anyone) as long as the payment is made directly to the school. And even in addition to that a person can pay for medical expenses not covered by insurance if payment is made to the provider. No Federal Gift Tax return is required unless you exceed the $14,000 amount.

This is a long way of saying that substantial assets can be transferred to benefit the next generation with basic planning and good advice. More complicated tax planning, including charitable giving options, can further reduce the Federal Estate Tax for an individual. If assets exceed the exemption, the decedent’s estate pays 40 percent on the excess.

The Generation Skipping Transfer Tax is a second tax which applies at death if a person leaves assets to the second generation, i.e. grandchildren, in excess of the exemption amount referenced above. Seldom does that happen due to easily drafted documents which preclude that tax from ever applying to an estate. Should that tax apply, again it is a 40 percent tax rate.

In 2015 approximately $17 billion dollars were paid in Federal Estate taxes so it is not an insignificant source of revenue for the Treasury.

As an estate planning attorney for several decades, I want my neighbors and others to have a basic understanding of the Federal Estate Tax and the Generation Skipping Transfer Tax. Regardless of how one feels about the proposed tax reform, it is always better to be informed about the actual law than what pundits and politicians may say on television, the papers, etc. Often misleading and inaccurate statements are made which confuse or, even worse, mislead taxpayers. Hopefully this letter provides you with some factual information for assisting you in understanding one part of the proposed tax reform.

Bob Wells lives in Hopkinton.