I have never liked or favored the estate tax, and yet I was very much of two minds about actually abolishing it. It actually did die for a year, before the legislation sunsetted and things reverted to the previous status quo, although it’s to be admitted the exemption amounts are now significantly larger. Estate tax reform was extremely popular, yet I suspect lawyers and accountants of being the culprits behind its return, in violation of client interest. Planning for estate tax it is only one of the issues involved in planning for what happens after your death.
The benefit of no estate tax (or one that doesn’t impact a particular estate) is obvious: people don’t get taxed, so their heirs get what they earned rather than the government. This is a good thing, and I favor it for that reason.
On the other hand, there were so many mechanisms varying from outright gifting to 529 accounts to life insurance to trusts, each of which except the first can be used to retain control and benefits of assets while avoiding estate tax liability, that estate tax was basically voluntary. You had to just not plan in order to pay estate tax, and some of the mechanisms available actually increase your available estate over what would have been its original gross value otherwise. Since we know that death is something each of us is going to have to face, there can be no reason except stupidity for not undertaking to plan for it. Whatever else it may be, estate tax is a voluntarily paid tax on stupidity.
Furthermore, there are other estate and contingency planning options that people need to take care of, and fewer people are doing so as estate tax was one of the primary levers that moved people to do it. All of this planning is just as necessary as estate tax planning, and usually taken care of at the same time.
Here are just a few of the other issues:
Will: The will probably should not be used for financial purposes, but resolves other functions such as who gets custody of minor children. Please note that a will is not necessarily binding upon the states where your will is probated, and can be challenged. Many wills are challenged, a large portion of them successfully, and even if your estate wins the battle it will be diminished in the process.
Durable Power of Attorney for Health Care: if you can’t make health care decisions, this tells who you delegate that power to. If there’s a court case brought, it’s going to be very short and abrupt. Case closed.
Trusts, revocable and irrevocable. I’m not certain it’s possible to successfully challenge a well-constructed trust where the assets that are actually transferred to it are concerned. You didn’t own them. The trust does, and the trust didn’t die. The instructions live on, like a corporation. The named successor trustee also usually gets the ability to manage the trust’s assets if you are alive but incapable. Assets in a trust can avoid not only estate tax, but probate as well. If you want to be certain of the disposition of what you leave, particularly in a speedy manner, this is probably the way to go. Many estates are not finished with probates for years, and until they are, your heirs don’t get control of the assets. Probate is also expensive, time consuming, and lucrative for attorneys. Seven percent of probated assets seems to be about the minimum cost, and it can easily top thirty percent. I haven’t investigated, but I suspect the trial lawyers would be solidly behind the return of estate tax for this reason.
Business operations: many small to medium sized businesses have no plan to keep them going in the event the owner-operator dies or becomes disabled. Certainly nobody else working there has the knowledge, the experience, and often the necessary licenses. If the business closes because the proprietor isn’t there, it’s worthless. If there’s a plan of succession to keep it open and operating, however, you or your family can likely sell it as a going concern with consistent profit.
Retirement plans: If you have certain types of tax deferred retirement plans, they can be expensive to convert to assets in your heirs’ possession, even without estate tax. Better to draw these down and keep other accounts available.
Life Insurance: There are going to be expenses when you go. These vary from taking care of the body you leave behind to probate to keeping your business running if you have one. The people doing these things want cash. Life insurance is usually the cheapest way to pay them. Your family is also likely to need something to replace your income. Life insurance is about the only choice.
One hopes you begin to get the idea. Consult an attorney and financial professional in your area to find out how it works, but all of this needs to be taken care of, or your family will wish you had.
Caveat Emptor