How does the proposed tax reform affect your estate plan?

Late last month, Sept. 27th to be exact, the president held an event in Indiana where he “outlined” his proposed tax reforms under his tax plan called the Unified Framework for Fixing Our Broken Tax Code (Unified Framework). The same day, the White House released a nine-page summary of the reforms. Three things were clear from the speech and the release: 1. The president is enthusiastic about the savings Americans can expect on their income taxes; 2. Businesses need to be taxed at a rate that is more competitive with other nations so more jobs can be kept at home and 3. The Estate Tax needs to be repealed.

I, for one, am also excited about reform that would accomplish each of those goals. However, I was looking for more substance in both the speech and the proposal that was released.

Let’s first address the specifics that were released. The first $12,000 of earned income by a single individual and $24,000 for married households filing jointly will not be taxed. That is almost double what the current standard deductions of $6,350 and $12,700, respectively. This sounds great… on the surface. What isn’t expressly stated is that the personal exemptions will presumably disappear. Although this will make that tax code simpler, it could effectually result in very little or no savings.

Under existing law, a single filer can couple the $6,350 standard deduction with the $4,050 personal exemption to achieve a $10,400 break from federal income tax. The net savings under the proposal is a much less impressive $1,600.

For married couples with children, it can actually result in a tax increase. Currently, a married couple with two children can combine the $12,700 standard deduction with the $16,200 in personal and dependent exemptions to obtain a $28,900 break from federal income tax. That is $4,900 more that the couple gets to keep than the $24,000 deduction under the simplified plan. Under the proposed plan, the more kids you have, the worse off you are.

The other proposed strategy to simplify the code is to consolidate the seven tax brackets to just three.

Current tax brackets: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent

Proposed tax brackets are: 12 percent, 25 percent, and 35 percent

As we’ve seen from the comparison of the proposed simplified deductions, simpler does not necessary translate into savings. The new brackets will only result in savings if income thresholds for each bracket are set so a greater percentage of people taxed at a higher bracket under the sevenbracket system would find themselves in a lower bracket under the threebracket system. Now we can address the elephant in the room. The president’s proposed brackets do not include the income thresholds. Therefore, it is impossible to determine whether the modification would lower or increase an individual’s taxes.

For example, a person with income of $60,000 currently pays taxes in three different brackets: 10 percent on the first $9,325 of taxable income; 15 percent on income from there to $37,950, and 25 percent on the rest. Thus the taxes would be approximately $12,500. If the income threshold for the 12 percent and 25 percent brackets under the proposal was $10,000, the first $10,000 would be taxed at 10 percent and the balance would be taxed at 25 percent, resulting in a total tax of $13,500.

Finally, something that has been preached with resounding enthusiasm is the proposed elimination of the Federal Estate Tax (aka Death Tax). Although I personally feel that once you’ve paid taxes on the money you’ve earned you should be free to give it to anyone you choose tax free. That is my position whether the gift is given during life or upon death. However, as an estate planning attorney, I am in the position to see how the current Federal Estate Tax laws affect most Americans. From my vantage point, rarely do I see families, farms or business facing financial hardship due to estate taxes owed upon the death of an individual.

To put this in perspective, the Estate Tax is 40 percent. But the estate tax exemption of $5.49M per individual ($10.98M) per couple eliminates 99.8 percent of estates of Americans who die each year. In other words, the 0.2 percent of Americans with $11M or more in assets should consider the many planning options available to avoid the 40 percent tax that would be imposed on their estate upon their death. For the rest of us, there might be bigger, more pressing issues to concentrate our time and energy toward.

Although taxes may not be a reason for the average American to get planning, probate is. Even though most Americans don’t have a multi-million dollar estate to plan for, they do have a legacy. Whether that is one of a caring individual who planned for the inevitable or left family feuds and financial chaos will likely be determined by their decisions to meet with a qualified estate planning attorney.