The New and Proposed Estate and Gift Tax

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Early in my career, it seemed like every planning conversation included Estate planning ideas.  Then the laws changed.  The federal Estate tax went up to $11.7 Million per person exemption.  The state of NJ eliminated the estate tax.  Since last January, the conversations are starting up again, and with the proposed changes, we might be discussing in most conversations again.  Let’s take a quick look at some of the changes.

  • Currently, a person can pass away with $11.7 Million or a couple with $23.4 Million, and the estate would not be taxed.  The proposed plan will lower the individual exemption from $11.7 to $3.5 million or $7 million a couple. 
  • The rate at which the estate is currently taxed is 40% flat.  Meaning anything over the exemption amount will have a 40% tax applied.  The proposed law is slightly more complicated.
    • $3.5 million to $10 million at 45%
    • $10 million to $50 million at 50%
    • $50 million to $1 billion at 55%
    • Over $1 Billion at 65%
  • Currently, you can gift $15,000 to as many individuals in one year as you want.  The proposed changes will allow for the same $15,000, but to only two beneficiaries a year.  This can get complicated if you have three or more kids.

Another law that changed with the secure act last January is the Required Minimum Distributions (RMDs).  Before the change, individuals 70.5 years or older had to take distributions from their IRA.  The age increased to 72.  The difference I believe which has the most significant impact is the beneficial IRA RMD rule.  It applies to non-spousal beneficiaries.  Before the change, if my mom leaves me her IRA, I will have to take an RMD each year based on my life expectancy.  Under the new law, I would have to take a complete withdraw within ten years of the date of my mom’s death.  I don’t necessarily have to take it each year or all at once, but it must be fully liquidated by ten years.  As we know, these withdraws are taxable at ordinary income rates.  For those of you who want to leave as much as possible to your children, you need to consider this change. 

As with anything, proper planning can help us to leave our estates to our beneficiaries efficiently, but it needs to be planned!

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