The Trump administration has proposed federal tax reform that would eliminate the federal estate tax. Also referred to as the death tax, the federal estate tax applies to residents of New York and the other states. The reasoning behind the proposed elimination is that it is a sort of double taxation, often requiring payment of taxes on funds that have previously been taxed. Even if the federal estate tax is eliminated, though, there are still reasons to develop a comprehensive personal estate plan.
Perhaps the primary reason estate planning will remain relevant is to ensure assets are distributed based on the wishes of the decedent. Indeed, even under the current estate tax regime, estate planning may allow for significant assets to pass without being affected by taxes. Individuals with complicated family situations, people who have had multiple spouses, for example, or those who have children with different partners, may need more comprehensive estate planning to avoid potential family conflict.
Additionally, even if the federal estate tax is discontinued, many states have their own estate taxes. State exemptions are generally much lower than the federal exemption, so they’ll apply to many more people in the relevant states. If the federal tax is eliminated, there will likely be consequences that impact taxes going forward, including the potential discontinuation of stepped-up tax basis on inherited assets. Federal tax planning will therefore still be beneficial even if there is no estate tax to consider.
Individuals who have questions about the estate tax or estate planning generally might want to consult an attorney. An attorney may be able to help by examining assets and liabilities and preparing documents that address the client’s individual goals and circumstances.