Estate tax reform has been a hotly debated topic for many years. This tax, also known as the “death tax,” is a federal tax on the transfer of assets from a deceased individual to their heirs. While the estate tax only affects a relatively small number of very wealthy individuals, it has been a source of controversy for decades.
Recently, there has been renewed interest in estate tax reform, with lawmakers considering changes to the way the tax is structured and applied. Here’s what you need to know about what is being proposed and how it might impact you.
What Is Estate Tax Reform?
Estate tax reform can take many forms, but generally, it involves changes to the way the federal estate tax is calculated and applied. For example, lawmakers might propose increasing or decreasing the exemption amount, which is the value of an estate that is exempt from taxation.
Another option might be to adjust the tax rate itself, which is currently set at a flat rate of 40% for estates valued over the exemption amount. Additionally, some lawmakers have proposed eliminating the estate tax altogether.
Changes to the federal estate tax would have a significant impact on individuals with large estates, as well as their heirs. It’s important to understand how any proposed changes might affect your financial planning and estate planning decisions.
What Has Been Proposed?
There have been several proposals for estate tax reform in recent years. One idea that has gained traction is increasing the exemption amount, which is currently set at $11.7 million for individuals (or $23.4 million for married couples). Some lawmakers have proposed increasing this amount to $50 million or more, while others have suggested eliminating the tax for estates below a certain threshold (for example, $5 million).
Other proposals include adjusting the tax rate itself, lowering it from 40% to a lower percentage or eliminating it altogether. Some lawmakers have also proposed creating a “step-up” in basis for inherited assets, which would reduce the capital gains taxes owed by heirs when they sell inherited assets.
How Might These Changes Affect You?
The impact of estate tax reform on individuals will depend on the specific changes that are made. However, there are a few general considerations to keep in mind.
If the exemption amount is increased, fewer estates will be subject to the tax. This means that more wealthy individuals will be able to pass on their assets to their heirs without paying any federal estate tax.
Alternatively, if the exemption amount is lowered or eliminated, more estates will be subject to the tax. This could create an additional tax burden for heirs who receive large inheritances.
If the tax rate is adjusted, then the amount of tax owed by large estates could be significantly reduced. This would benefit wealthy individuals and their heirs by reducing the amount of estate tax they are required to pay.
Finally, if the step-up in basis is eliminated or changed, heirs could face higher capital gains taxes when they sell inherited assets. This could impact the financial planning decisions made by heirs and could make it more difficult for them to manage and maintain inherited assets.
Conclusion
Estate tax reform is a complex and evolving topic. While changes to the federal estate tax will likely only affect a small percentage of individuals, they could have a significant impact on their financial planning and estate planning decisions. Whether or not you are subject to the estate tax, it’s important to stay informed about any proposed changes and to consult with a financial advisor or estate planning professional to ensure that your finances and assets are protected.
