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Is a Change to the Estate Tax on the Horizon?


By Sam A. Moak


The information in this column is not intended as legal or tax advice but to provide a general understanding of the law.  Any readers with a legal problem, including those whose questions are addressed here, should consult an attorney for advice on their particular circumstances.

Well, President Obama has come out with a comprehensive plan for changes that could take away many of the strategies that save families estate taxes.  Annual exclusion gifts, generation-skipping trusts, grantor retained annuity trusts (GRATs) and many more estate tax vehicles are in his target.  Obama would like to turn the clock back to 2009 when the estate tax exemption was $3.5 million per person (currently $5.43 Million), the lifetime gift/GST exemptions were just $1 million per person and he wants to raise the estate tax rate (currently topped at 40%).

This all seems to boil down to our government’s inability to manage money.  Obama sees these changes as an opportunity to bring in an estimated $214 billion dollars over 10 years.  Just reverting how estates and gifts were taxed in 2009 would bring in $189 billion of that.  Republicans are not on board with this and are actually still trying to kill the federal estate tax entirely.  Let us hope they prevail.

The proposal to restrict GRATs has been around awhile.  This is a type of trust in which you can put an asset you expect to appreciate a lot, and any appreciation over a low Internal Revenue Service hurdle rate (just 2% for February 2015) goes to the heirs tax-free.

Another proposal that could impact life insurance needs is a so-called “simplification” of the gift tax exclusion for annual gifts.  Currently, individuals can make a gift of $14,000 to as many people as he/she wants without having to worry about estate or gift taxes.  However, under the new proposal, a $50,000 overall limit for certain gifts such as transfers to trust or family limited partnerships would be put into place.  If this is enacted, then the change would limit life insurance trust planning through irrevocable life insurance trusts to $50,000.

Another very troubling proposal is the elimination of the stepped-up basis.  When a property is passed upon death to another, then the basis (cost) of the property passed is “stepped up” to the current fair market value.  This eliminates years and potentially thousands of dollars in gain.  Thus, when the property is sold by the heirs they have to pay a greatly reduced capital gains tax.  Elimination of the stepped-up basis would me heirs have to pay more capital gains tax.  Oh, and yet another of Obama’s proposals is to increase the capital gains tax from 20% (it has already been increased from 15%) to 28%.

The estate tax related matters I have discussed are not the only items targeted, here is a list of more:

Limiting the Duration of the GST tax exemption

Limiting certain tax expenditures like home mortgage interest by capping their value at 28%

Close the S corp payroll tax loophole

Repealing Coverdell education savings accounts

Repealing workplace child and dependent care spending accounts

And for those college sports fans, eliminating the deduction for charitable contributions that entitle donors to a right to purchase tickets to sporting events.

You should always keep an eye on what your government is doing, particularly with your money and taxes.  Do not rely on this article, but instead watch what is going on and seek the assistance of a tax professional like your CPA.

If you have a question regarding Elder Law, Estate Planning, Living Trusts or Probate in the Huntsville area, please contact us at 936-295-6394 or visit our website. Call today and we will connect you with an experienced Elder Law and Probate Attorney. We can schedule you a face to face appointment to discuss your circumstances. If you have questions or are considering any aspect of your estate plan, probate, your health care directives, etc. we can help! Call us now at 936-295-6394 . We look forward to hearing from you and assisting you with any and all elder law and estate planning needs.

Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C. He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas.