Dear Michael: Any further news on how the new tax structure will be as we move forward with our estate planning? – Caught in the Headlights.
Dear Caught in the Headlights: Perhaps, this is how the whole country is feeling right now. One part of Congress is trying to press an agenda while the other is fighting the ways and means of paying for it.
The last report was from the House Interim Committee. In this report they outlined several things. This committee is like an abitur to determine what will pass and what will not pass a vote by Congress.
The proposed capital gains tax on assets, taxed at death on any assets which have appreciated throughout your lifetime – has been taken off the table – at least until it gets to the Senate.
In lieu of this, the proposal is to roll back the estate tax limit to $5 million with an inflation index on it bringing it up to around $6.5 million per person or what it had been prior to the last tax bill. This would mean a single person could pass $6.5 million without taxes and a couple could pass $13 million. The tax rate proposed raises the rate from 40 percent to 45 percent.
Until any law is enacted, the current $11.2 million per person gift and estate tax amount is the same. Anyone taking advantage of these amounts will not have to face repercussions from IRS later. IRS made a ruling in February stating any changes in future laws would not allow them to “claw back” any gift or estate taxes due under the new law. Gifts for a couple can be used up to this $22.4 million dollar amount presently and until any new law becomes effective.
For people who want to take advantage of the current $9 million difference, prior to any tax law change, might consider a Spousal Lifetime Account Trust – whereby assets can be transferred to a trust with income rights for their spouse. This gift amount made to such a trust could be excluded – even if the estate tax credit drops in the future.
This is a limited time ability to use this gift. The new proposals negate this current exclusion by stating if a grantor’s trust has any income rights, then IRS would include this gift back into the grantor’s estate.
In addition, the top tax rate on capital gains during lifetime is proposed to be 25 percent –up from the current 20 percent. No further news on this subject at the time of this writing.
The corporate tax rate was proposed to be raised from 21.5 percent to 26.5 percent on C-Corporations earning more than the income limit. This proposal has hit a wall as a lot of Democratic representatives are not in favor of raising rates this high. We will see if they meet in the middle.
An interesting change allowable under the new proposal is that owners of S-Corporations could change to an LLC (Limited Liability Company) without any tax issues involved.
Prior to this the S-Corp would have had pass through taxes to the owner to remove any assets from the S-Corp. This might be an advantage for many people who farm with an S-Corp. There will be a proposed two-year window to do this.
However, the proposed law negates one of the key elements of an LLC in estate planning – that element being able to lower the value of the assets in the estate due to gifting minority ownership rights to other people. IRS would no longer allow such deductions in value.
This has been in the works for a long time, so this change is not unexpected. Whether they honor current LLCs who have done this at time of death – if death occurs beyond the tax law enactment – is yet to be resolved.
People with estates larger than $13 million should really consider meeting with an estate specialist to see if there are ways to reduce their estate tax liability in the future. The current $22 million gift and estate tax status might be or might not be there in the future.
Michael Baron provides estate planning guidance at Great Plains Diversified Services in Bismarck, North Dakota. Email him at KeeptheFamilyFarm@gmail.com.