With a new President and Congress, AAFCPAs anticipates there will likely be major changes to our tax code in a year or two. Among those are possible changes to the federal gift and estate tax. Currently there is a 40% federal tax on everything we own at the time of our death, and on gifts made during our lifetime. There is also currently a combined federal estate and gift tax exemption for 2016 of $5,450,000. This is the amount that each person can own at death or give away during their lifetime without being subject to the federal estate and gift tax. A married couple potentially has a combined exemption worth $10,900,000. Currently, there is “portability” of the exemption; meaning that any unused exemption at the death of the first spouse can be carried over to the surviving spouse to add to their estate and gift tax exemption.
With such a large exemption from the estate and gift tax, planning around its use has also come to include significant income tax planning. This is because any assets potentially subject to the federal estate tax at your death receive what is called a “step-up in basis.” What is important to understand is that “basis” is the amount for which you purchased an asset. When you sell the asset you pay income tax on the difference between the sales price and your basis. For example, if you purchase a share of stock for $10 and sell it for $50, you pay income tax on the $40 difference. If your heirs inherit the same stock that you purchased for $10, and the fair market value on your date of death is $50, their basis becomes the $50. If they sell it for $50 the next day, they pay no income tax and that $40 is never subject to income tax. As you can see in this example, it may be beneficial to your heirs to have assets subject to the estate tax (at least up to the exemption) in order to receive the step-up in basis.
While President-elect Donald Trump wants to end the federal estate tax, as well as the step-up in basis on assets at the date of death, approximately 20 states have an estate or inheritance tax. And AAFCPAs anticipates that many of these states will likely retain some form of an estate tax to keep up revenue. Many of the states have much lower limits on what is subject to estate tax, such as Massachusetts which taxes estates worth $1 million or more. The tax rate in Massachusetts is graduated from 0% to 16% depending on the size of the estate. Many individuals have sought to avoid the Massachusetts estate tax (and income tax) by becoming residents of states that have no estate tax, such as Florida. This can be particularly easy for those who also have homes in Florida, by choosing to live there at least 183 days out of the year. There are additional requirements that must be met to ensure that you change your domicile to Florida, and you should speak to your AAF advisor to determine if they have been met.
AAFCPAs understand that every tax situation is unique and requires a careful and comprehensive plan. We communicate regularly and openly with our clients to ensure a full understanding of all strategic options available, including tactical guidance on how election results may impact short and long-term tax planning.