Estate and Gift Taxes in 2017

The amount exempt from the federal estate tax goes up to $5.49 million per decedent on January 1, 2017, an adjustment for 2016 inflation. The lifetime federal gift tax exemption is also $5.49 million. Married couples have two exemptions, so they can shield $10.98 million from transfer taxes. However, in the minority of states that continue to have estate and/or inheritance taxes, the amounts exempt are generally much lower.

The federal gift tax annual exclusion continues to be $14,000. No adjustment will be made to this threshold until the accumulated inflation pushes it to $15,000. Married couples who split their gifts (that is, treat a gift by one as made equally from both of them) may give $28,000 to each of as many persons they wish, without putting a dent in their $10.98 million combined lifetime gift tax exemption.

However, there is a real question concerning how much longer the federal estate and gift taxes will stay on the books. A majority of Republicans as well as many Democrats are on the record as favoring the end of these complicated taxes, as the revenue they raise is not significant in the federal budget. Some have defended these transfer taxes as a barrier to the accumulation of dynastic wealth, but history suggests they have not succeeded in meeting that objective to date.

President-elect Trump included elimination of the federal estate and gift tax in his tax reform proposals during the campaign. This is likely to be a lower priority than reformation of the corporate tax, which has a far greater impact on economic growth. Still, if the tax-reform train pulls out of the station in the spring, modification of estate and gift taxes is likely to be one of the cars.

Even if the taxes are repealed, however, that won’t mean the end of planning for “death taxes.” It appears likely that in place of the estate tax we could see a return of carryover basis, as happened in 2010 (the year the estate tax was optional). Alternatively, unrealized capital gains might be subjected to a capital gains tax at death, as is already done in Canada.

© 2016 M.A. Co.  All rights reserved.

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Social Security in 2017

Automatic cost-of-living adjustments (COLAs) were created for Social Security benefits in 1975. The COLA for 2017 is 0.3%. Here are the basic Social Security numbers in 2017 for your reference.

Tax rate for employees 7.65%
Tax rate for self-employed 15.30%

Maximum earnings taxable
Social Security wage base $127,200
Medicare wage base no limit

Retirement earnings test exempt amounts
Under full retirement age $16,920
($1 in benefits is withheld for every $2 in earnings above the limit.)
For the year in which full retirement age is reached $44,880
($1 In benefits is withheld for every $3 in earnings above the limit, but only for months prior to reaching full retirement age.)
After full retirement age is reached no limit

Taxation of Social Security benefits
Singles with a “provisional income”*below $25,000  no tax on benefits

rom $25,000 to $34,000 tax on 50% of benefits

over $34,000 tax on up to 85% of benefits

Marrieds filing a joint return with a “provisional income”* below $32,000 no tax on benefits
from $32,000 to $44,000 tax on 50% of benefits
over $44,000 pays tax on up to 85% of benefits

Maximum Social Security benefit at normal retirement age $2,687

*The IRS defines “provisional income” as your modified adjusted gross income (MAGI) plus nontaxable interest plus one-half of your Social Security benefits. (MAGI is adjusted gross income plus tax-exempt income.)

© 2016 M.A. Co.  All rights reserved.

Tom Clancy’s Widow Wins Her Court Battle

The estate plan of noted author Tom Clancy had three equal trusts, one for the children of his first marriage, a marital trust for his surviving second wife, and a family trust for the second wife and the daughter they had together. The trusts were funded from the residuary estate (whatever is left after paying expenses and any specific bequests), and Clancy’s will also called for estate and/or inheritance taxes to be paid from that same remaining fund. The personal representative of the estate (who also had drafted the will) proposed to pay half of the federal estate taxes due on Clancy’s $83 million estate from the trust for the adult children, the other half from the family trust. The taxes came to roughly $15 million.

Mrs. Clancy objected. Before his death, Clancy had executed a codicil to his will, to clarify that he intended both the family trust and the marital trust to qualify for the federal estate tax marital deduction. That suggests that the trusts for Mrs. Clancy should not be tapped to pay taxes, because assets that don’t share in the creation of the estate tax burden should not have to pay those estate taxes. To the extent that the widow’s share is used to pay the estate tax, the marital deduction must be reduced, which means still more estate tax, and a further reduction in deduction, and yet more taxes, in an extended circular computation. In fact, if Mrs. Clancy’s share is free from the tax burden, the actual estate tax due will drop by nearly a third, to roughly $11 million.

That’s what the probate court decided was proper, it’s what Clancy apparently intended with his codicil to the will.  In a 4-3 decision, the Maryland Court of Appeals agreed with that conclusion in August. A savings clause in the codicil “explicitly directs that the personal representative not act to adversely impact the benefit of the marital deduction of the marital trust and the family trust.” Three dissenters believed that Clancy probably did not appreciate just how much that seemingly minor savings clause would upend the overall result of his estate plan.

The result is decidedly unequal for the five children. The child from the second marriage will get roughly one-third of the estate, undiminished by taxes. The share for the other four will be reduced roughly 40% for taxes, and then split four ways among them. Whether Mr. Clancy expected an outcome for his estate plan to have as many twists and turns as the plots of the books that he wrote remains an open question.

© 2016 M.A. Co.  All rights reserved.

IRS Announces 2017 Retirement Plan Limits

To make it possible for voluntary retirement savings to keep up with inflation, the various numerical limits embedded within qualified retirement plans are indexed for inflation. In October the IRS announced the numbers that will apply in 2017, as shown in the following table:


Note that the deferral limits for 401(k) and 403(b) plans are unchanged from 2016. Catch-up contributions are permitted by those employees who are 50 years of age or older during the calendar year.

Personal saving for retirement never has been more important. These tax benefits make saving a bit less painful.

© 2016 M.A. Co. All rights reserved.