Estate planning – how can it not be about the estate tax when estate tax rates are at 40%? Well, of course estate tax is still a major concern, but primarily for wealthy taxpayers with closely held assets and insufficient liquidity. With the estate tax due within nine months of death, planning to avoid or reduce estate tax is still the primary concern for many decedents.
The major difference in 2016 is that the estate tax exemption is $5 million per person, indexed for inflation. So each individual can protect $5,450,000 ($10.9 million for a married couple). Thus, the federal estate tax is no longer an issue for most decedents. The paramount tax concern for most Americans is an income tax rate exceeding 40%. Combined with deduction phase-outs and add-ons, plus state income taxes, the total income tax rate can be 50 percent.
So the focus in estate planning for all but the affluent has shifted from estate tax planning to income tax planning and avoiding capital gain tax on assets passing to beneficiaries. Upon death, assets receive a step-up in basis to fair market value, meaning if the beneficiary then sells the inherited asset there is no capital gain tax. In contrast, strategies to reduce estate tax often involve trusts, which do not allow a step-up in basis, or gifting assets, where the recipient receives a carryover basis and no basis step-up.
This shift in emphasis and focus on income taxes began in 2013, and has become more prominent since as the estate tax exemption and income tax rates continue to rise. So when it comes to estate tax planning in 2016, out with the old and in with the new to reduce income tax. This change of emphasis affects new estate tax planning and the revision of existing estate plans.