Simplicity and Certainty

(Image from berkshiremm)

Last year we engaged a lawyer to update our estate documents, which had been executed in 2002. The most confounding obstacle was the uncertainty surrounding the estate-tax exemption:

Under the current rules laid out in the 2017 tax law, today’s nearly $14 million exemption would expire at year-end and drop by about half.

To get ahead of that cliff, Americans have been making lifetime gifts to use up the higher exemption amount before it sunsets.

If Congress does not act to extend the $13.99 million-per-person exemption, it will fall to about $7 million next year.

Bay Area homes that originally cost several hundreds of thousands of dollars now sell for $2 million or even double that amount. The switch from employer defined-benefit plans to 401(K) and IRA investment accounts makes visible the present value of pension benefits and inflates estates. While $7 million has always been a princely sum to most Americans, that threshold is now attainable by many homeowners who live in the Bay Area.

The new tax bill wending its way through Congress not only will increase the current exemption slightly but makes it more likely to be "permanent" in that it will require the Democrats to control both Congress and the Presidency to change.

Under the bill, an individual could die in 2026 with $15 million, and a married couple with $30 million, without owing estate tax. These amounts rise annually alongside inflation. The proposed changes have no expiration date...

The certainty of a new, higher exemption is a game changer for estate planning, estate lawyers said. “The permanence is a big deal for our family businesses, so they can do more long-term succession planning,” said Palmer Schoening, chair of the Family Business Coalition, which lobbies for estate tax repeal.

If the new, higher exemption amount is permanent, most individuals with estates under $15 million probably don’t have to worry much about estate taxes or do estate tax planning.

I do appreciate the certainty, which allows us to simplify our new estate documents. Don't under-estimate the virtue of financial simplicity in allowing one to sleep more easily at night.