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To Tax or Not to Tax, That is the Question :: Retirement Success :: THE RETIREMENT SOURCE®
To Tax or Not to Tax, That is the Question

Tax Laws Change Over Time

There are currently no experts in estate and gift tax law. That is true because the federal estate tax laws may go through several stages over the next few years, or not. These changes include increasing the lifetime exclusion amount, reducing tax rates, total repeal of the tax and reversion to the pre-2001 rates.

Congress has made attempts to come to a long-term agreement, but so far has been unsuccessful. As a consequence nobody knows what the rules are beyond 2019. Many states base their taxes on the federal schedule and may adapt to protect their revenues. So, these too are unsettled. If the currently scheduled federal taxes hold true, most American will not have to worry about the federal tax.

However, there is no assurance that future changes will not be for the worse. The estate tax return is quite complicated and the tax is levied on the net estate after several allowable deductions. The current schedule on net estates is available at the IRS website (see

Gift Tax and Generation Skip Tax

There are also special rules for the lifetime amount that may be gifted to other persons and penalty rates for transfers that “skip” a generation. These are important considerations for those wishing to transfer large estates, but are way too convoluted for discussion here.

Several states also have estate transfer taxes. Some like the federal tax are levied against the estate’s right to know transfer property and some, called inheritance taxes, are levied directly against the heirs. Most state have an additional amount to absorb the state credit against the federal tax and still others have no direct estate tax at all.

Federal Estate Taxes and Lifetime Exemption
2014 $5,340,000 40%
2015 $5,430,000 40%
2016 $5,450,000 40%
2017 $5,490,000 40%
2018 $11,200,000 40%
2019 11,400,000 40%
2020 11,580,000 40%

The state of Ohio (see has a tax on net estates to persons other than a spouse:

Over $338,333 but not over $500,000 - $13,900 plus 6% of the excess over $338,333
Over $500,000 - $23,600 plus 7% of the excess over $500,000

The Ohio estate tax has been repealed effective in calendar year 2013.

No Income Tax
No Estate Tax
No Income Tax
Estate Tax
Income Tax
No Estate Tax
Income Tax
Estate Tax

Escaping Quadrant IV

As with other aspects of Personal Values-Base Estate Planning, the GRIDs method can help to identify the ownership and strategic planning status for tax purposes. Recall that Quadrant I is always the best and Quadrant IV is always the worst, but Quadrants II and III are often interchangeable. As the Income and Estate Tax GRID shows, some types of ownership are subject to both income and estate taxes. Retirement accounts, for instances, represent all untaxed income. Thus, a transfer at death may be subject to estate tax and the liability for income tax would remain as the funds are withdrawn. This is income is taxed as Income in Respect of Decedent (IRD) and is the cause of all the horror-filled ads to sell estate tax products and services.

There are a number basic strategies that, with proper planning, can move substantial amounts of your estate free of the gift and estate transfer taxes and out of Quadrant IV to a better position.

The most basic strategy is to understand the Lifetime Exclusion Amount. As shown on the previous page, each person is entitled to exclude this amount, currently $11,400,000, from federal estate tax. If your personal net estate is less than this amount, your estate would not currently be subject to federal estate tax. (But may still be subject to state estate transfer taxes.) A married couple each having their individual assets properly registered could shelter $22,800,000 from the federal tax. This means that most people, with proper planning, need not worry about federal estate taxes right now. In our planning approach we always urge clients to:

Live for the Best, but Plan for the Worst

That means it is imperative to have your estate planning documents drafted with enough flexibility built in to optimize the Lifetime Exclusion Amount whatever it may be. Many older wills and trusts were not designed to accommodate the incredible magnitude of changes mandated in the recent legislation. If used properly this exclusion can result in great tax savings for larger estates. If not, it represents one of the biggest errors in estate planning.

The second basic strategy of estate planning, the Unlimited Marital Deduction, allows for virtually unrestricted gifting or estate transfer to one’s spouse (who is a U.S. citizen) without incurring gift or estate taxes. This is a very powerful planning tool, but is frequently misunderstood and overused resulting in much larger taxes upon the death of the second to die. It is often closely tied to the Lifetime Exemption. In many cases the husband owns most of the assets and arranges to leave everything to his wife. While neither may have assets exceeding the exclusion amount at that time, by leaving everything to the wife she then may have a taxable estate. (This is not an issue at present because the surviving spouse can claim any unused portion of the deceased spouse’s Lifetime Exemption to take full advantage of the $22.8 million allowance.)

This is another issue that may reappear in 2020 to upset rigidly designed documents. The problem is especially true if there is further asset growth before the survivor's death. There are several strategies to reduce the impact of this problem. The simplest strategy is just to make sure that a couple’s assets are registered in a manner that will optimize these exclusions for both husband and wife. Only then can good document preparation make the most of this planning device.

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