The satirical tabloid is still in publication. But certainly anyone with any age to their credit remembers the heyday of its popularity back in the 1960s and 1970s when Mad Magazine was on the stands and in the hands of its huge adolescent readership.
Its regular features were the stuff of the contemporary culture and the benign, iconic face of the bi-monthly periodical was that of Alfred E. Newman, whose response to all things of concern, major or minor, was simply, “What, me worry?”
Let’s consider a simple overview of a worrisome planning topic
Every taxpayer has available the right to pass during life or at death up to $11,400,000 in assets (adjusted annually for inflation) without federal gift or estate taxation. With proper planning a married couple can between them pass a total of $22,800,000.
The recent dramatic increase in this lifetime exemption has lolled many advisors into thinking that potential death tax liability doesn’t demand much attention. After all, only 2 in every 1000 taxpayers will be affected.
But several things should be discussed with each client:
- When it rains, it pours – Once the exemption has been exceeded, every dollar in the taxable estate is taxed at 40%.
- Peace of mind – It is always surprising how many of the 98.8% of the clients not in danger of the death levy assume that the tax applies to everyone. Discuss the issues, disclose the numbers and put them at ease regarding the relationship their estate probably will not have with the IRS. Plus, it the discussion will make it look like you know what you are doing.
- Remains of the day – The increased exemptions have a sunset provision. At midnight, January 1, 2026, the exemptions will be reduced by 50%. Unless, a client plans to die before then he or she should treat the current exemption as only $5,700,000 (again, adjusted annually for inflation) for planning purposes.
- Double-dipping in a marriage is not automatic – Most couples plan to avoid tax at the first death utilizing the unlimited marital deduction, deferring the exemption of the deceased spouse for use at the second death. To preserve this unused exemption an estate tax return must be filed, even if no tax is owned.
- States of confusion – At least seventeen states have their own death tax. The top rate may be lower, but the protective exemptions may be lower as well. A client’s property located in the state is subject to the tax even if the client doesn’t live there.
So, what’s to worry?
Even if clients have no current tax liability on their financial horizon they need to be reminded that the tax law “is a fickle food upon a shifting plate.”
Any or all of it can be changed, added to, or eliminated by Congress between now and the time they pass away. It may always be wise to affordably carry coverage even if the amount is more than sufficient to cover a current potential tax liability.