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100 Years in the Making… A Brief History of the Estate Tax and how the Election Could Impact Its Future

This fall marks 100 years since President Woodrow Wilson signed into law the Revenue Act of 1916, which introduced the estate tax to Americans. Originally proposed by Congress as a means to raise revenue in the face of the then-called “Great War” sweeping Europe, the estate tax is imposed on a person’s assets at death.

Given that the 2016 estate tax exemption amount is $5.45 million per person ($10.9 million for married couples), the Center on Budget and Policy Priorities estimates that just two out of every 1,000 Americans owe anything at death. However, the 0.2% of Americans with estates above those levels generally have their assets taxed at 40% before being passed on to their heirs.

In honor of National Estate Planning Awareness Month this October, below are three popular options to reduce or eliminate estate tax liability:

  1. Outright gifts, either to charity or individuals. Direct gifts to charities are never taxed, regardless of the amount, while personal gifts that fall within the annual gift exclusion amount ($14,000 individually or $28,000 by married couples, as of 2016) are free from gift tax. This allows individuals to systematically reduce the size of their estate by giving annually to children, grandchildren, etc., with the added benefit of seeing the results of their gifts while they are alive.
  2. Gifts in trusts. There are several options for trusts, from an irrevocable trust for the benefit of a group of beneficiaries to a grantor retained annuity trust (GRAT) where the person making the gift (the grantor) receives a stream of income for a period of time. Funding these trusts will use a portion of one’s lifetime gift exemption ($5.45 million individually or $10.9 million collectively, as of 2016). GRATs are especially popular since they are able to take advantage of low interest rate environments, such as we experience today. However, if interest rates do rise, they may lose some of their appeal.
  3. Direct education and health expense payments on behalf of others, which do not have an upper limit. These are not subject to the $14,000 annual gift tax exemption, but they must be made directly to the institution rather than to an individual. This is a great opportunity to shave off some of your estate if a grandchild is heading to college, especially somewhere like Harvey Mudd College.

Looking ahead, the results of the 2016 election could significantly affect the estate tax, as the candidates have fundamentally disparate views regarding its usefulness. Hillary Clinton favors reducing the estate tax exemption to $3.5 million ($7 million for married couples). She has also proposed instituting a higher, graduated tax rate with a cap of 65% for individual estates worth more than $500 million ($1 billion for married couples), a rate adopted from Senator Bernie Sanders’ campaign. On the other hand, Donald Trump favors repealing the estate tax.

Despite the wide-ranging political debates that the estate tax—or death tax, depending upon your political persuasion—has engendered, in reality, it is not a huge revenue source for the government. According to The Wall Street Journal, Congress’s Joint Committee on Taxation estimates that between the years 1950 and 2014 the estate and gift tax contributed a combined average of 1.4% annually to federal revenue, compared to a whopping 44% for individual income tax over the same period.

With proper financial planning, it is possible to eliminate or reduce your estate tax liability. However, it is an increasingly complicated field with ever-changing regulations. This past August, the Treasury Department released proposed regulations to restrict or eliminate valuation discounts of minority interests in family-owned businesses for estate-tax purposes. Family business owners should consider the benefits of accelerating any gifting of these assets to the future generation in advance of these regulations potentially becoming law.

At Balentine, we take a holistic approach to wealth management. Our goal is to help our clients enjoy the wealth they have accumulated during their lifetime and provide for future generations and charities and philanthropies in perpetuity.

Please contact us if you have any questions regarding your wealth management or estate planning needs.

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