WILL THE US GOVERNMENT REALLY KILL THE DEATH TAX? [ESTATE TAX]
The “death tax” is a cynical name for the estate tax paid when a wealthy person dies. Under current law, the tax does not kick in until a person kicks off, and even then, only if a person leaves more than $5.25 million behind. But when it does take effect, it is large: 40%. So, let’s say a family business is worth $25M. When Mom and Pop die, the first $10.5M passes to their beneficiaries without any inheritance/death tax. The balance, $14.5M, is taxed at the 40% rate – a $5,800,000 tax bill. There are ways to reduce that bill, and some involve complicated and expensive strategies that cost billions of dollars each year to implement.
The good news for most of us (well over 95%), is that we will never get hit with this tax (or have to get fancy with our estate planning because our estates are much smaller than $5 million. The question is, therefore, why or whether we should care at all. One answer: Because “small” business owners who build their businesses and want to preserve wealth for their posterity have to spend money on paying or reducing this tax instead of hiring employees and building the economy.
An opinion piece in Forbes notes that the US House now has enough sponsors of a bill to kill the death tax to make up a majority. So, the House will likely soon approve – again (last time was 2005) – the death tax repeal. The fate of that bill is much less certain in the Senate, and it is frankly unlikely the Obama administration will approve of this; it looks too much like a benefit to the “rich.” The author of the bill, Congressman Kevin Brady (R-Tex.) argues that burying the death tax “will grow the economy and create even stronger tax revenues.” We may not get the chance to see if that lofty prediction holds.
Meanwhile, ordinary Americans have the same incentives they have always had to create an effective estate plan: Pass hard-earned wealth to their beneficiaries without the interference of the government and courts. They can accomplish that by using simple and inexpensive strategies like forming a revocable family trust also know as a revocable living trust.