How Much Inheritance Will University Professors' Heirs Lose to Taxes?


Oct 17, 2016

Inheritance Tax for Professor's Heirs

Hillary Clinton wants to increase it. Donald Trump wants to abolish it.

Based on the dialogue from the second Presidential debate, that’s what we know about the presidential candidates’ positions on the federal estate tax.

Estate tax is levied on the value of a deceased person’s assets upon distribution to the heirs.

Many people don’t realize that the federal estate tax applies to only two out of every 1,000 estates, according to current law. In 2013, Congress approved a $5 million per person exemption. Indexed for inflation, it now stands at $5.45 million, $10.9 million for a married couple. Most professors look at these numbers, and since their estates do not reach those exemptions, they assume their heirs won’t need to worry about taxes on their inheritances.

This is not the case, because for professors, most of the estate value is derived from their tax-deferred university retirement plans. Income tax has never been paid on this money.

Therefore, the recipients will pay up to 40 percent of the accounts’ value in federal and state income tax. Unfortunately, there is no exemption for income tax at your death, not even $1. Also, there are state estate taxes that don’t have the same exemptions as federal estate taxes. Depending upon where you call home, state estate taxes will kick in at varying rates.

For 99 percent of university professionals, the federal estate tax changes proposed by Trump and Clinton will have NO effect on how much federal estate tax is paid.

Secretary Clinton wants to increase the estate tax to as much as 65 percent, up from the current 40 percent. Specifically, she is calling for a 50 percent rate on estates worth over $10 million per person, 55 percent for estates over $50 million, and 65 percent for estates exceeding $500 million. So while the estate tax as currently constituted only applies to 0.2 percent of estates, the 65 percent rate would apply to a fractional percentage of the 0.2 percent.

Trump, on the other hand, says he’d like to repeal the federal estate tax. But capital gains held until death and valued over $10 million would be subject to tax, with the exception of small businesses and family farms. Trump says those two entities have been particularly victimized by federal estate tax, often forcing the heirs to sell the family farm or business.

As long as the federal-estate-tax-exemption limit remains above the level of most professors’ estates, the proposals of candidates Clinton and Trump to change the rate on estate taxes will have little to no impact on how much federal estate tax your heirs will pay.

The good news in all of this: to the extent that even $1 of tax is paid at death, that tax dollar is totally voluntary. Under the current rules and regulations, all estate taxes and income taxes can not only be reduced at death, but can be eliminated entirely if that is the goal.

We have done individualized estate planning for hundreds of university professionals. If you have any questions about the taxes on estates and how they affect you and your heirs, you are invited to call Filbrandt & Company at 800-431-9740.



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