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Death is Inevitable; Fortunately, Death Taxes May Not Be.

Posted: April 19, 2019


  • Recently, federal estate taxes have only been imposed on very large estates.
  • Tax law changes could result in smaller estates having to pay estate taxes.
  • Careful planning today can help safeguard your assets from taxes tomorrow.

"Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”    -- Justice Learned Hand, Senior Judge of the United States Court of Appeals for the Second Circuit

In the latter part of the 19th century, Cuba, Puerto Rico, and the Philippines were struggling for independence against Spanish rule.  The U.S. was their ally in those efforts.  In the midst of these tensions, the United States battleship Maine was apparently struck by a Spanish mine on February 15, 1898 while at anchor in Havana Harbor.  (Questions still remain as to the actual cause of the explosion.)  The warship sunk, killing 260 American sailors.  Shortly thereafter, the United States declared war against Spain.  The War Revenue Act of 1898, which was signed into law on June 13, 1898, imposed a wide range of new taxes to raise revenue to finance the U.S. involvement in the Spanish–American War.  One levy was the predecessor to the current federal estate tax.  

Just about everyone can benefit from some degree of estate planning.  Proper planning allows you to (i) direct how your assets are distributed after death; (ii) designate who oversees the distribution of your assets at death; (iii) safeguard assets inherited by your heirs from lawsuits, bankruptcy, divorce and other types of creditor claims; and (iv) name the person(s) who will act as the guardian(s) of minor children or incapacitated adults. 

In the past, avoiding unnecessary death taxes was another important reason for having a carefully crafted estate plan.  As of late, however, estate taxes have been less of a concern due to changes to state and federal death tax laws.  At the time of this writing, just 12 states impose a tax at death, and the federal government does not collect a federal estate tax on estates valued at less than $11.4 million (indexed for inflation) -- double that amount in the case of married couples. 

Death taxes could be making a major league comeback in the not-too-distant future.  Several members of Congress have proposed imposing death taxes on much smaller estates.  For example, Senator Bernie Sanders is sponsoring legislation entitled “For the 99.8% Tax Act” that would reduce the current federal estate tax exemption from the current $11.4 million per person to $3.5 million.  Mr. Sanders has also proposed raising the federal estate tax rate to a maximum of 77%, up from the current rate of 40%.   

Senator Sanders is not alone in looking at revising the federal estate tax in an effort to redistribute wealth and raise tax revenues.  President Obama consistently proposed reducing the federal estate tax exemption to $3.5 million during his presidency.  Senator Elizabeth Warren’s American Housing and Economic Mobility Act” would return the death tax rate to 2009 levels and impose a maximum tax rate of 45% on estates as small as $3.9 million. 

Another tax provision that has been under frequent attack is the basis adjustment that currently occurs when the owner of stocks, bonds, real estate and other capital assets dies.  This tax rule provides for the tax basis of appreciated capital assets to be increased (or decreased) to fair market value at death.  This can be a major tax saver in the case of appreciated securities, as the following example illustrates. 

In 1980 Willy Wonka buys 1000 shares of Chocolate Factory Inc. stock at price of $5.00 a share, for a total investment of $5,000. Willy holds onto the shares until his death.  When Willy dies in 2018, those same shares are trading at a price of $500 a share, for an aggregate value of $5,000,000. Willy’s estate plan leaves the shares to his son, Wally. Wally promptly sells the stock to pay for a new yacht. Under current tax law, Wally would not pay taxes on any of the gain realized on the sale. By comparison, some tax proposals would subject the entire $5,000,000 sale proceeds to income taxes. Moreover, some are proposing those taxes be imposed at ordinary income tax rates.   

While the future of tax law is never certain, the risk of a significant increase in taxes at death is rising.  It seems almost inevitable that death taxes will come back to life at some point. That means the time to act is nowThe good news: Careful planning today can lock in the tax benefits currently found in the tax code.  Please contact us if you would like to discuss what options may be best suited to your situation.  

Thank you for reading. If you enjoyed this article, please consider subscribing to my weekly blog. You can do so by CLICKING THIS LINK. 

Andrew J. Willms, JD, LL.M. 

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