As the U.S. Congress debates the tax reform plan championed by the Trump administration and Republican lawmakers, many people with considerable assets to leave their families look forward to taking advantage of one of the plan’s key elements if it passes. That’s the elimination of the estate tax — commonly known as the “death tax.”
Those who have supported the elimination of this federal tax for years argue that it taxes inheritances on which people already have to pay income tax — thus requiring them to pay taxes twice on the same assets.
If the federal estate tax is eliminated, the tax burden of a large inherited estate will be eased for some Americans. Further, it will simplify estate planning for those who want to leave their significant wealth to family members and others without creating a large tax burden for them.
However, even for people in the majority of states (including Arizona) that don’t have a state estate tax or inheritance tax, careful estate planning will still be necessary. You want to be sure that your assets are distributed as you intend and that money from your estate doesn’t have to be unnecessarily spent on other taxes or fees.
For example, similar plans proposed in the past have also eliminated the tax basis step-up for inherited assets. That step-up helps people avoid having to pay capital gains tax on appreciation of an asset earned while the owner was still alive. If that step-up is eliminated, heirs could face greater tax liability for those capital gains.
It’s yet to be determined whether that will happen under the final version of the plan.
Even if, like most Americans, you don’t have the sort of assets that would trigger a federal estate tax, it’s essential to have an estate plan that will provide for your loved ones as others as you choose. Having a plan that includes all of the documents relevant to your family’s unique situation will simplify things for them when you pass away. An experienced Arizona family law attorney can help you accomplish those important goals.
Source: The Motley Fool, “3 Reasons You’ll Still Need Estate Planning Even if the Death Tax Disappears,” Dan Caplinger, Oct. 21, 2017