Estate Taxes. To Plan or Not to Plan? There is No Question!

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Today, we’re going to talk about estate tax. Currently, you can give five million dollars to an heir through your estate and incur no estate taxes whatsoever. You might be asking, what is the importance of thinking about estate tax planning when deciding how to leave your hard earned assets to your children and grandchildren? There’s an easy answer for that: you have to plan for it. It’s negligent not to think about it and have a financial adviser and attorney help you to look at the future.

Change is constant. That’s one thing that we can be sure of. Even if the limit is five million dollars today, we know that policies alter. Laws are repealed. It happens all the time. One regime will be exchanged for another regime, in Washington and at the state level. Looking at history, we can be certain that the laws and policies are going to differ with each new administration.

This means we have to anticipate that the estate tax will increase or decrease from the current five million dollars, so make sure that your attorney and your financial planner or adviser thinks about those factors when you’re crafting an estate plan. These two professionals should be working in combination. The attorney to develop the vehicle for you to get to where you want to go and the financial planner to fill that vehicle with the gas.

What has the estate tax been historically? Let’s look at a publication on the IRS’s website, www.irs.gov, entitled The Estate Tax: 90 Years and Counting (1). It’s written by some of the experts in the field. It says, “For the past ninety years, and at key points throughout our American history, the federal government has relied on estate and inheritance tax as a source of funding.” That first line tells you something immediately. The federal government is looking at estate tax as a revenue and source of funding.

As someone who’s planned and worked your entire life to accumulate assets, you’ve got to know that they’re going to be looking at this as an income stream. Just looking at that first quote, you know that the five million dollars will eventually move lower. If you want to know how to predict the future, look at the past.

Getting back to the paper, we see, “Proponents have frequently advocated that these taxes are effective tools for preventing the concentration of wealth in the hands of relatively few powerful families, while opponents believe the transfer tax discourages capital accumulation, curbing national and economic growth. This tension, along with fiscal and other considerations, has led to periodic revisions of federal estate tax laws. Effecting both the size of the decedent population subject to the tax and revenue collected.”

That closing segment of the first paragraph lets you know that there are two sides of this coin. While it’s $5 million dollars right now, when the other side comes in with the opposing view, it’s going to go lower. It’s going to be used to collect revenue to run the government. Again, this is straight from the IRS’s website. Essentially, the taxing authority is telling you that these things fluctuate. It’s logical to think that the people in power that are funded by people with these views are going to vote in accordance with them and with their party.

Estate tax is not a new concept, by the way. In this paper, it points out that estate tax can be traced back to ancient Egypt, as early as 700 B.C.. Nearly two thousand years ago, Roman emperor Caesar Augustus imposed the Veselina Hereditation, a tax on succession and legacies to all but close relatives.

We should have been planning for these things back two thousand years ago. It’s not a new idea. You need to plan. Governments are going to use this as a way to fund everything from schools to wars and every other kind of initiative. One of the most interesting parts of the document is Figure C, which shows significant estate tax law changes from 1916 to present. Starting at about $40,000 and all the way up to the present day $5 million. Certainly, an increase is understandable with the change in the economy, but there are fluctuations both higher and lower.

The conclusion of the entire paper states that politics are involved. The paper provides a brief history of the estate tax and it’s impact on the US budget. It also examines the ways in which the economic behavior of the effected population has changed over time in response to the market, technological, and political stimuli. Certainly, those variables, politics included, are involved. You need to plan for it because politics are always shifting.

Are the estate taxes administered when you make a will and trust, estate plan, and buy your investment vehicles? No, the estate tax is administered when someone passes. It’s dependent on what the law is then, not what the law is now or when drafting takes place and planning takes place.

How can you plan appropriately and correctly? There are a number of complicated strategies to do that but to summarize, there are certain ways to pass assets outside of probate and shelter them from estate tax using instruments like trusts and trusts working in combination. There are ways to draft language into trusts that don’t allow a lump sum to pass at one time and allow the recipient to receive income yearly, which is taxed as income tax.

This avoids actually taking ownership of the entire lump sum property or the corpus of the trust, as it’s called, at one time. Do yourself a favor and consult both a financial planner and attorney regarding these matters and how they relate to you. I hope I’ve helped shed some light on why it might be important to plan for estate tax. Even though the estate tax limit might be high right now, that’s just a brief snapshot in history.

 

[1] The Estate Tax: Ninety Years and Counting: http://www.irs.gov/pub/irs-soi/ninetyestate.pdf

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