I've been closely following the proposed changes to the estate tax both in the House and Senate for the past couple weeks before we head into the season of turkey, in-laws, and awkward conversations. For my friends out there, here's a couple things to know on how this could possibly affect your estate, especially if you are a HNW individual, HNW family, or startup entrepreneur who hit it big. Let's talk Federal Estate Tax!
The Estate Tax
Sometimes the Federal Estate Tax is poked fun at under the moniker of the "Death Tax", but what does it do, you may ask? When you pass on an estate to the next generation, the Estate Tax kicks in if your aggregate assets are in excess of $5.49 million as a single person, or $10.98 million if you are married. If you're above this, your estate could be paying a max of 40 percent to Uncle Sam and his bullion coffers.
The House and Senate Proposals
Under the tax reform plan proposed by the House of Representatives, the estate tax would disappear after 2024. In contrast, the Senate version PRESERVES (you heard that right) the estate tax, but would double the aggregate assets sheltered, for example a married couple could possibly shelter $22.4 million next year.
I was listening to Bloomberg just the other day and one of the commentators mentioned the Byrd Rule, which is an amendment named after Democratic Senator Robert Byrd that was passed in 1990. The Byrd Rule basically means that if this tax cut would affect the federal deficit after 10 years, the Estate Tax would be reinstated after that time. For example, if the new rules apply in 2018, you would experience a terrific dream for about 10 years, but then on January 1, 2028 we will wake up to the old reality of estate taxes and the complex estate planning steps needed to deal with that fallout.
The estate tax is and will always be a moving target. Remember that Congressional actions are the furthest thing from permanent. I've been to several meetings and lectures on this very topic, and from the last show of hands at one of these events, the professional consensus seems to be that the estate tax will be repealed, but who knows how long for. My gut tells me it will be around in some form or another, especially since after last year's election, anything can happen. Of course, there is still the state estate tax to deal with, and there are many tactics to mitigate the impact of the tax, but there are maneuvers that can be done through the estate planning process. I'd also talk about the change in stepped-up basis, but that's another conversation after we have our fill of turkey and family shenanigans next week. I'll be monitoring what Congress does next over the month or so. In the meantime, the holidays are just around the corner and now might be a good time to start that conversation with your family at the turkey table to talk about estate planning. Anyhow, I wish you all a Happy Thanksgiving if I don't get to see you all and tell you in person.