Death taxes are no longer a regular topic of conversation. The issue of death taxation has fallen into the background, because most Americans will not pay death tax under the current law. As a result, many people are being drawn into a sense of complacency that their family will not have to worry about the issue after their death.
Being drawn into complacency can result in missing out on opportunities to avoid death taxation in the future.
Under the current law, if you die in 2020, you can pass assets worth just over $11.5 million to your children at the time of your death without facing death taxation. If you are married, with effective planning, you can double that number to around $23 million. Statistically, because of these large exemption amounts, most families will not pay death tax … if they die in 2020.
What does the future hold for death taxation? Under the current law, the death tax exemption will be reduced by one-half on Dec. 31, 2025. However, there is nothing that prevents Congress from adjusting the death tax structure prior to the end of 2025. Or anytime in the future.
We are currently in a very favorable death tax environment. Believing that that environment will continue indefinitely is not a wise assumption. Death taxation has swung wildly in the past from favorable to unfavorable. As of the writing of this article, the front-running Democrat presidential candidate’s position is to reduce the death tax exemption to $3.5 million and increase the base tax rate to 45%. If that policy were successfully implemented, your family would pay 45 cents of every dollar over $3.5 million to the government. That is the lowest level of the progressive rate proposed; larger estates would pay significantly more.
Assuming the current tax environment will remain unchanged is dangerous. You need to face the brutal reality that taxation is going to increase in the future — and plan accordingly.
Tactics to consider
What can we do to help protect our families? First, take the time and effort to plan as if your family will face death taxation. Preserving the current environment upon the first death of one spouse in a married couple is a step many families are failing to take. This step could provide significant protection if the tax environment takes a turn for the worst. By taking the proper steps, you can preserve your deceased spouse’s unused exemption amount for use by your family later. The IRS has now confirmed that the amount you preserve for future use will not be affected by a reduction in the death tax exemption in the future. Your family will always have that exemption to use, besides whatever exemption is available to the surviving spouse at the time of their death.
In addition, upon your death you can structure the inheritance received by your surviving spouse or family members in a manner that will not be subject to death taxation in the future, including whatever it grows to be before their death. This technique can effectively eliminate the death tax problem for future generations – and if properly designed, can still preserve the income tax advantage of dying if death taxation is not an issue in the future.
Many opportunities for effectively planning to avoid death taxation will be lost once taxes increase. The time to plan to protect your family is now, while the environment is favorable. I encourage everyone to plan with death taxes in mind, instead of planning as if they are not a problem. Looking forward and avoiding the problem is always better than looking back and regretting the past.
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 at his website, estateplansthatwork.com.