Another Step Toward Raising Taxes

Not surprisingly, with a presidential election year coming up, a lot is being said about the taxes we pay, and what changes should be made.  Seems like everyone is happy raising taxes other people pay, but no one wants to see their own tax bill go up.  When it comes to estate tax rates, or taxes on the money you leave behind for your heirs, that debate also rages on.

For years, Republicans have continued to attack the “death tax” as unfair and punitive, particularly as applied to family farms and small businesses.  Legislation enacted in 2017 resulting in increasing the exemption on individual estates to over $11 million per person.  The size of an estate that is now exempt from federal estate taxes in 2019  for U.S citizens is now $11,400,000.  This amount increases in 2020 to $11,580,000, and inflation adjustments will continue annually under the present law. The current rate at which amounts over the exemption are taxed is 40%, meaning that every additional million dollars over the exemption will generate a $400,000 tax bill.

The good news for 99.9% of Americans is that with such a large exemption, estate taxes are no longer a concern.  But will it last?  As has often been said, nothing is safe while the legislature is in session.  But we do know that if nothing is done, the current exemptions expire at the end of 2025, so the rate if nothing happens will be reduced back to the old rate, adjusted for inflation up through 2025, and will probably land somewhere around $6 million per person (economics is not my thing, so don’t expect any predictions on inflation here).


Proposed Tax Law Changes

But now Democrats in the house have started an effort to further reduce estate tax exemptions and raise rates on estates. Their argument is that the disparity of wealth between the rich and everyone else has grown significantly to levels not seen in over a century. Representative Jimmy Gomez, a California Democrat, has introduced legislation in the house that mirrors Bernie Sanders’ efforts in the Senate.  The newly introduced bill would first drop the exemption amount from 11.4 million to only $3.5 million per person, subjecting significantly more Americans to taxes on their estates.

And while the exemptions are going down, the rates proposed would go up.  The tax rate on estates from $3.5 million to $10 million would increase to 45%.  The rate for estates between $10 and $50 million would jump to 50%, estates between 50 million and $1 billion would be taxed at 55%, moving to 77% for estates over $1 billion.

Finally, the legislation significantly bolsters the generation-skipping tax, deleting the exemption entirely for many of the trusts which are commonly used in estate planning.  This means if you dislike your children, love your grandchildren and want to leave your estate to the latter, you have to choose either very limited protection for those grandchildren or they’ll pay a double estate tax on what you want to leave them.

What will finally (if there is ever truly a “finally”) come of this?  Hard to say.  But what this does mean is that planning for all these scenarios adds a new level of complexity to estate planning, meaning more Americans will need to get guidance from an experienced estate planner in drafting or adjusting their estate plans.


By Michael G. Carroll