By Michael A. Dolan
There is a lot of misinformation floating around the subject of death taxes. News stories, quick references in adviser materials and narrowly focused website information make it hard to get a solid understanding about the issue and what it means for your family’s future.
Here are some critical facts and considerations that I hope will help clarify some issues for readers:
Fact. Upon your death, you can leave an unlimited amount of assets to your surviving spouse, and your estate will be exempt from death taxation. This is referred to as the unlimited marital deduction. While the government is being generous in allowing you to do so, exercising caution before quickly adopting this strategy is always recommended.
Fact. Under the current law, the death tax exemption is $11.4 million for individuals who die in 2019. If the total amount you leave to individuals, other than your spouse, is less than $11.4 million, your estate will not incur death taxation. Each year, the death tax exemption is adjusted for inflation. On Dec. 31, 2025, the law “sunsets,” and the death tax exemption will be one-half of the inflation-adjusted amount beginning in 2026: for example, $5.7 million using this year’s exemption value.
Dangerous assumption. Many individuals are operating under the assumption that the current death tax exemption is “permanent.” The current death tax structure was put into place while the Republicans controlled Washington. Basing your future plans on the assumption that these large death tax exemptions will always be available in the future is very dangerous. The political pendulum can, and will, swing back to the left. As of this writing, the leading Democrat presidential candidate is proposing a $3.5 million death tax exemption, and increasing the current 40% flat tax rate to be a progressive rate of between 45% and 77%.
Fact. For married couples, the first spouse to die can leave the unused portion of his or her death tax exemption to the surviving spouse. Because both spouses have their own death tax exemption, with appropriate planning, a married couple can shelter $22.8 million from death taxation.
Dangerous assumption. Many individuals assume that the transfer of their spouse’s unused death tax exemption happens automatically. However, to transfer any unused exemption, a death tax return must be filed in a timely manner upon the first death — even if the estate tax return is not required otherwise. Failing to preserve the first spouse to die’s death tax exemption could potentially result in millions of dollars of additional death taxation when the second spouse dies.
A wise approach is to plan now in the most favorable environment, while taking into account the likelihood that taxation will increase in the future. Many professional advisers are only focusing on the current favorable environment. As a result, they are failing to recognize and implement planning opportunities that will be lost when the pendulum swings back to the left.
There are very effective planning techniques available that capitalize on the current favorable environment while addressing the risks of potential increased death taxation in the future. When it comes to estate planning, you should make hay while the sun shines.
Dolan, an attorney, helps farm and ranch families achieve comprehensive estate, succession and legacy planning objectives. He is the principal of Dolan & Associates, P.C. in Brighton and Westminster, Colo. Learn more on his website, estateplansthatwork.com.