Republican Presidential Nominee Donald Trump proposed his new economic plan recently. Among other things, Mr. Trump would like to see the Federal Estate Tax completely eliminated. The Federal Estate Tax is a federal law that charges a tax against a decedent’s estate if they exceed beyond a certain amount of wealth at the time of their death. Inflation, politics, and other circumstances have caused exemption amounts and rates taxed to vary greatly over time. For example, 46% of the excess amount above $2 million was levied against a decedent’s estate in 2006. Today, the estate tax exemption is currently $5.45 million per person, or $10.9 million per married couple. If an estate exceeds the current exemption amount, that estate is taxed at approximately 40% of the amount that exceeds the exemption amount.
As noted, the current amount exempt from this estate tax is almost $11 million for a married couple, and half of that for an individual. Obviously, not everyone will accumulate the amount of wealth required to subject their estate to this tax. However, while Donald Trump wants to eliminate the tax, Democratic Presidential Nominee Hillary Clinton has pledged to reduce the exemption amount to around $3.5 million. Lowering the exemption amount would make more Americans susceptible to having their estates taxed upon their death. As a result of more Americans subject to estate tax, more tax revenue would be earned for the federal government. Conversely, an outright elimination of the federal estate tax would see the revenues earned from the federal estate tax disappear. In the year 2015, approximately $25 billion was paid back to the government as a result of this estate tax, compared to approximately $200 billion from standard income taxes. Additionally, doing away with the estate tax altogether could yield a reduction of contributions and donations made to charitable organizations. Currently, many wealthy Americans make charitable donations as a way of reducing the value of their estate below the threshold of the exemption amount. If eliminated, there is not an incentive to continue making charitable donations from an estate tax liability perspective.
Whether red or blue prevails in November, the law regarding the estate tax exemption appears to be heading towards a cloudy shade of grey. The ramifications of these proposed changes could greatly affect how Americans view their finances and taxable estates. In turn, the changes could impact how estate planning attorneys and financial planners advise their clients on protecting their wealth. It will be interesting to see what the ultimate outcome is.