Currently, a big inheritance could leave you with a large tax payment. However, things could change in the future. The newest GOP tax plan aims to get rid of estate tax. If the bill passes, then you could be inheriting your estate with no taxes in as little as six years. Find out how the new tax plan could change estate tax forever.
The New GOP Tax Plan
Although the new GOP tax plan proposes several interesting changes, one of the most significant changes comes in the form of estate tax. Also known as a death tax, an estate tax forces individuals to pay taxes on their inheritance. Under current tax laws, you can receive up to $5.49 million without the need to pay taxes. If a married couple leaves you under $11 million, then you don’t need to pay an estate tax. However, anything more than either value leaves you with a death tax. Beneficiaries of large inheritances need to pay a 40% estate tax.
40% is a considerable sum when you’re dealing with millions of dollars. For those expecting a large inheritance or hoping to leave one as a legacy, the new tax bill is coming to the rescue. The new tax plan will, at first, double the estate tax exemption. However, the doubled exemption will not be permanent. By 2023, the estate tax will be repealed. The new tax plan will keep one provision. If a beneficiary inherits an asset and sells it for more than the cost, then the individual does not need to pay a capital gains tax.
Why Get Rid of It?
According to some economists, the death tax is a harmful one. Some economists believe that it is an obstacle to economic growth. For that reason, some argue that getting rid of the tax is in the US economy’s best interest.
Others argue that the estate tax hurts family businesses and farms. For example, a farm owner already pays tax on his business. When the farm’s owner gives the farm to his daughter upon his death, she pays taxes for the farm. It’s a form of double-taxation. When the father owned the farm, he already paid taxes on it. Republicans argue that getting rid of the estate tax is for the good of family-run businesses and farms. They also argue that it is the next step towards a tax code that doesn’t “pick sides.”
What It Means for You
If you plan on leaving your family or friends an inheritance, then you need to plan carefully. Leaving anything over the exemption value could leave them with hefty taxes. Instead of being a gift, your inheritance to them could be more of a burden. Estate planning is especially important. When you plan properly, you can find ways around the death tax.
For example, some people decide to give gifts rather than leave an inheritance. If you give a monetary gift to your loved ones, then you can do so without tax. There is a tax-free $5 million gift allowance over your lifetime. Every year, you can give as many individuals as you want $14,000. There is no gift tax on a sum up to $14,000. Currently, only one state has a gift tax -Connecticut. Other than that, you can give away your money without the recipients needing to pay taxes on it. If they have college tuition or medical bills, then you can also pay those bills. When you do, they don’t count towards your gift exemption. You still have the $5 million allowance.
Of course, gifting isn’t perfect. The only way that you can ensure the money is used the way you want is through a trust. If you set up a trust, then you can put terms on the money. Another issue to consider is the cost. Unlike an inheritance, you need to give a gift immediately. If you can’t afford to give away the money now, then gifting is not a good option.
There are several other options for evading the death tax. However, it all involves careful planning. And none of the options are perfect.
The Future of Estate Tax
Fortunately, you might have less to worry about in the future. If you plan to leave an inheritance anytime after 2023, then you might not have to worry about your beneficiaries paying taxes. If the inheritance occurs anytime after the passage of the new tax bill, then it may be low enough to fall under the new estate exemption law.
As a result, your benefactors could end up with no death tax. Your lifetime net-worth could get to them, and the government wouldn’t take a huge cut of the profit. However, it all depends on the passage of the new tax bill. There is no guarantee that it will pass. Some politicians object to the terms of the tax bill. Before it passes, there could be some changes to the provisions.
For now, you should consult with an estate planning attorney. It’s the best way to stay in-the-know and make a smart decision with your estate.