If Congress has its way, the federal estate/gift tax may become extinct. But what does that really mean for tax planning purposes?
If the repeal is enacted, it could take as long as 10 years to phase out the tax — and 10 years is a long time to leave yourself open to significant, although decreasing, tax liabilities. Others are doubtful that the repeal will ever take place.
In the face of these uncertainties, what are you supposed to do?
Wait and see?
If you feel confident that the tax will be repealed, you might want to consider doing nothing at all. If you don’t make any changes, and the tax is repealed, you’ve avoided spending money on tax planning fees and you’ve avoided the tax.
The primary benefit of taking the wait and see position is that you won’t waste dollars on tax planning strategies that complicate your life while not reducing your tax bill. If you’re young and in good health, this might be an appropriate strategy.
This holding-pattern strategy, however, is not ideal for everyone. People who are older or in only marginally good health may not want to take the risk that they could die without taking tax-reduction steps. Dying with a taxable estate can subject your property to taxes of up to 55 percent of its value, more if retirement plan assets are part of the estate.
People with a low risk threshold, or with pre-college aged children, elderly parents or other dependents to support over the long term may not want to leave estate/gift taxes to chance, either. If the tax is not repealed, taking tax-reduction steps may be more difficult to in later years.
Make gifts
If you’d rather not take a chance that the estate/gift tax will become extinct, or if you think, like many people do, that a gradual reduction (but not elimination) of the tax is more likely, consider making gifts to individuals and/or charities and begin sooner rather than later.
The real goal of tax planning is to eliminate some of your wealth so that you won’t be taxed on it later. If, for example, you are in your 30s or 40s, own a successful start-up company, are comfortable with your retirement program and anticipate continued growth in your business, consider giving some of your wealth away while you are alive.
Many gifting strategies result in a dramatic reduction in the property subject to tax, and many are structured so that no gift tax is payable. But if you have to pay a gift tax on the gifts, the tax paid will, in all likelihood, contribute to a smaller taxable estate at death.
One risk to this, however, is that if your assets suddenly depreciate as a result of a market downturn or other factors, you may not have enough wealth left to live comfortably. Another risk is that if the tax is repealed, you’ve given away some of your assets and received no tax benefit.
Spring for an estate plan
Another option is to create a tax reduction plan now, despite the possible repeal, but refrain from enacting it until the uncertainties go away. You’ll be spending some of your assets to create this plan, but that will be the extent of your losses, whether the tax is repealed or not.
Perhaps the most prudent thing to do is to conduct a cost/benefit analysis with an adviser who can help you calculate how much you could lose should the current estate/gift tax remain in force. With that information, you can take a calculated risk and not an uninformed one. David Henry ([email protected]) and John Hartzell Jr. ([email protected]) are attorneys who provide estate planning at the Pittsburgh law firm of Houston Harbaugh. Reach them at (412) 281-5060.
