It was the mid-1980s. Ronald Reagan was in his second term, Tears for Fears was on the radio, and I was in law school in upstate New York, taking my first estate planning class.
And what I learned was this: when it comes to estate planning, the inheritance taxes are absolutely everything. Nothing else matters.
But that was then, and this is now.
Estate taxes were indeed a big deal back then. The exempt amount – the number below which your heirs didn’t have to pay estate taxes – was only $600,000. Anything beyond that was subject to a very high tax rate. The top rate, in fact, was 55 percent. You read that right: the tax could be more than half of the estate. And if a husband and wife wanted to use both spouses’ exemptions, so as to exclude $1.2 million from the dreaded tax, they needed a horribly complicated device called an A/B Trust, which was going to cost a chunk of change (not to mention taking away some of the surviving spouse’s control over the assets).
It’s not that people weren’t concerned about anything else back then. But when you’re looking at even a relatively modest estate getting hit with a 55 percent tax rate, everything else seems unimportant. Sort of like deck chairs on the Titanic, to borrow a metaphor. If you tried to bring up anything else with an estate planner, chances are the response would be, “Do you want the government to take more than half of what you earned? No? Then let’s stay focused here.”
Jump forward to today. Estate taxes are still out there, and they still matter to people with very large estates. The rate is now 40 percent, which is still a lot even if it’s not 55 percent. But the exempt amount is all the way up to $5.45 million. That’s right, if someone leaves $5 million in assets, their estate doesn’t pay any death tax at all. And the exemption can be much more easily doubled for a married couple; all you have to do is file a form with the IRS after the first spouse dies. So for a few wealthy people, estate planning still means estate tax.
What about the other 99.9 percent of the population? They can now turn and face their other concerns: the cost and delays of the probate system, for instance. Or the possibility of feuding heirs. Immature or irresponsible kids who may squander their inheritance. Disputes between a second spouse and the children from the first marriage. Heirs who are receiving public benefits for disabilities and would lose those benefits if they inherited money directly. Not wanting the family’s dirty laundry aired in public. Hey, people with “only” a few million bucks still have a lot of concerns. The greed can be brought out for a lot less than $4.5 million.
This, unfortunately, is where a lot of estate planners have missed the mark. Having grown up, so to speak, on the idea that it’s all about the death tax, many planners have never adjusted their thinking. Less than $4.5 million? Don’t worry about it, just get a simple will and be done with it. That’s the attitude most people will now hear from a lot of estate planners.
But an estate of a million dollars – or even a lot less than that – is still substantial. And estate planners need to start looking at how they can use the knowledge and skills they have, to help the 99.9 percent achieve their goals.
If they don’t, they’ll be dividing up a shrinking piece of pie. And ignoring a lot of other folks who need their help.
Kenneth Kirk is an Anchorage estate planning attorney.
