On December 20th, 2017, Republican lawmakers and politicians gathered at the White House to celebrate the passage of the Tax Cuts and Jobs Act.
During the celebration President Trump announced that, “We have provided, for the most part, estate taxes wiped.”
Trump also stated that the new tax plan would prevent business owner’s from selling their businesses at “bargain-basement numbers” to reduce tax liability, and protect generational farmers and their family-owned farms.
In this article we’ve explained the recent changes to estate tax law and how these changes may benefit you financially. We’ve also explained the history of estate taxes and further outlined some of the changes that are likely to impact estate tax laws over the next seven years.
Quick Article Guide:
1. What is an Estate Tax?
2. What is the Estate Tax Exemption?
3. How the Federal Estate Tax Exemption Works
4. Does Your State Have an Estate Tax?
5. What’s the Future of Estate Taxes?
6. How to Avoid or Reduce Estate Taxes
7. Estate Planning for the Future
8. We Can Help with Your Estate Planning Needs
Estate taxes are taxes that levied against the assets you leave behind for your loved one’s when you pass away. Most estate taxes are collected by the IRS; however, some states also collect estate taxes.
Federal estate taxes, or “death taxes,” were first collected in the United States from 1797 to 1802 to finance the cost of the Revolutionary War. Over the next 100 years they were repealed and reinstated by congress to finance wars until the Revenue Act of 1916 passed.
Since 1917, some form of estate tax has been collected by the IRS every year, except 2010. In 2010, estate taxes we’re briefly repealed due to the tax cuts initiated by the Bush administration in 2001, but they were quickly replaced by Congress in 2011.
In December of 2017, the Tax Cuts and Jobs Act was passed by Congress in an effort to help boost the economy. This act went into effect on January 1, 2018, and as a result of its passing, the existing federal estate tax exemption increased from $5,490,000 to $11,180,000 per individual.
On January 1, 2019, the federal estate tax exemption will slightly increase again to $11,400,000 per individual, or $22,800,000 for married couples, to account for inflation.
Unless new laws are passed, these exemptions are scheduled to increase with each year until they peak in 2025. In 2026, the estate tax exemption levels will be cut in half or reverted to the 2017 schedule after adjustment for inflation.
If the gross value of your estate is less than the estate tax exemption (single or married) the year you pass away, your loved one’s will avoid federal estate taxes. If your single, you can leave the full value of your estate to whomever you choose, and they won’t owe the IRS a penny.
If you’re married you can leave your full estate to your spouse untaxed, and under current law, this will double your estate’s federal exemption. The larger exemption will decrease your estate’s tax liability when your spouse passes away and leaves your assets behind.
If the value of your estate exceeds the estate tax exemption when you pass away, your heirs will owe estate taxes on the assets you intended to leave behind for them. These taxes are due within 9 months of your passing and owing them often forces surviving family members to sell off assets for less than their full value to settle with the IRS.
Below we’ve provided an illustration of how estate taxes will be calculated for someone who passes this year. In the example below, we’ve assumed that the applicant’s estate has a gross value (property, jewelry, collectibles, savings, etc.) of $15,000,000 and they are unmarried.
In the example, the tax liability for this estate is a fraction of what it would have been a year ago, but a substantial tax liability remains. Depending on the size of your estate, you may also want to consider the potential growth of your investments or assets overtime, state estate taxes, and any changes in legislation that could decrease the estate tax exemption prior to 2026.
On another note, if you already have an irrevocable trust in place to settle or reduce your estate taxes at the time of your death, it may be time to revisit the terms of your trust with an attorney. If you happen to pass way in the next seven years, your trust may be substantially over-funded.
In addition to federal estate taxes, some states also impose their own estate taxes on their resident’s assets after they have passed away. In states like Washington, these tax rates can be as high as 20%, but paying your state’s estate taxes will reduce some of your federal estate tax liability.
As an example, New York state is home to the second-highest estate tax rates in the nation, 16%. However, once you consider the federal tax deductions provided by paying these state taxes, the effective tax rate levied by New York ends up being closer to 9%.
States that Collect an Estate Tax
|State||Exemption Per Individual||Estate Tax Rate
|Connecticut||$3,600,000||7.8% - 12%|
|District of Columbia||$11,400,000||8% to 12%|
|Hawaii||$11,400,000||10% to 15.7%|
|Illinois||$4,000,000||0.8% to 16%|
|Maine||$11,400,000||8% to 12%|
|Maryland||$11,400,000||0.8% to 12%|
|Massachusetts||$1,000,000||0.8% to 16%|
|Minnesota||$2,700,000||10% to 16%
|New York||$5,740,000||3.06% to 16%|
|Oregon||$1,000,000||10% to 16%|
|Rhode Island||$1,560,156||0.8% to 16%|
|Washington||$2,193,000||10% to 20%|
Traditionally, the District of Columbia, Hawaii, Delaware, and Maine have matched the federal estate tax exemption. In 2019, New York will follow suite and increase their exemption to match the federal estate tax exemption of $11,400,000.
Like federal estate taxes, each state’s estate tax laws are also subject to change at any time, and we always recommend speaking with a tax attorney before beginning your estate planning.
The future of estate taxes is uncertain to say the least. Recently, the state of Connecticut announced their plans to match the federal estate exemption by 2020, and New Jersey recently repealed their estate taxes in 2018, following the footsteps of Tennessee in 2015, and Indiana in 2013.
While some states have repealed their estate taxes in recent years, other states may introduce estate or inheritance taxes in the upcoming years. In addition, while the federal estate tax brackets are unlikely to change prior to 2025, no one know can predict the future, especially with changes to legislation.
Historically, it’s probably important to note that estate taxes were documented in most of our country’s history as well as in Ancient Egypt, Rome, and throughout Feudal Europe. With that being said; we don’t expect that estate taxes will ever be eliminated, even if they are reduced for a few years by our current legislation.
How to Avoid or Reduce Estate Taxes
Most tax attorneys, financial advisors, and banks recommend avoiding estate taxes by creating an irrevocable life insurance trust or ILIT. An ILIT allows you to purchase life insurance, which is an asset in the eyes of the IRS, without increasing your estate tax liability.
When you create an ILIT you separate the value of the assets your trust owns from the value of your estate. However, the trust be IRREVOCABLE. A revocable trust is easily modified, and it will be viewed as a personal asset. An irrevocable trust is managed by a trustee, and it cannot be modified.
To fund the trust, a permanent life insurance policy is purchased on your life. An irrevocable trust is managed by a trustee, and it cannot be easily modified. However, you can appoint a trustee of your choice and they must act in accordance to the terms of the trust.
When you pass away, your life insurance policy will pay your trust, and your trustee will then pay the IRS on your behalf to settle any estate tax liabilities. Your trustee can be an attorney, a bank executive, or a financially savvy family member.
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Estate Planning for the Future
If your estate is large enough, your heirs owe the IRS when you pass away, but how do you prepare for the future without knowing what your estate tax liability will be? Chances are, if you’re healthy enough to read this article, you’ll likely be alive in 2026 when the estate tax exemptions revert to back to where they were in 2017.
The American Taxpayer Relief Act of 2012 established a permanent exemption of $5,000,000 with an adjustment for inflation and a maximum estate tax rate of 40%. Based on the figures when can assume that the estate tax exemption in 2026 will be roughly $6,000,000 per individual or $12,000,000 per married couple.
This number will likely stay constant except for a slight annual adjustment each year to offset inflation. Depending on your marital status, if you expect your estate to be worth more than the exemption in ten years, it’s probably time to start planning.
Remember estate planning involves buying a permanent life insurance policy, and these policies increase in cost by 10 to 15% each year we age. Waiting seven years to start planning will end up costing you double, if you’re still healthy enough to qualify for coverage.
We Can Help with Your Estate Planning Needs
Estate planning involves creating an irrevocable trust with an attorney, but it also requires purchasing a life insurance policy to fund your trust. At JRC Insurance Group we specialize with estate planning life insurance and we can help you find the best rates based on your age and health.
By working with more than 50 top-rated insurance companies, we can shop the market to find you coverage until the age of 90, 95, 100, 105, 110, or 120, even if you have some health issues. Our agents offer multiple years of experience and we are experts at deciphering each company’s unique underwriting guidelines.
As an owner-operated, no-fee brokerage, our client’s our always our number one priority. We can help you with your estate planning needs, and help you estimate the amount of coverage you need, to ensure that your hard-earned assets are passed on.
Give us a call today to speak for a customized quote based on your needs and health. Toll-free 855-247-9555, or you can request a free quote below to compare lifetime coverage options form dozens of highly-rated insurers in less than a minute.
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