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How tax reforms and regulation changes could affect estates

Colorado does not have a state estate or inheritance tax. On the federal level, however, the estate tax is 40 percent. It only kicks in for large estates with a gross value of more than $5.49 million.

An analysis by the Tax Policy Center found that about 11,310 estates would need to file estate tax returns this year. After accounting for deductions and credits, only 5,460 would owe tax. If you are in the top 10 percent of income earners, you need to carefully consider legacy planning options.

Estate tax reform coming

We have been watching tax reform proposals closely as reconciliation of the Senate and House bills progresses. In early reporting on the tax bill that is coming out of committee it looks like estate tax breaks would expire in 2025 similar to individual tax cuts.

Fewer people will pay estate taxes down the road. Both bills increase the threshold before an estate pays tax to $11.2 million. The House bill included a repeal of the estate tax after 2024, while the Senate version reset to current levels in 2025. It is not yet certain which version will make it into law. 

Tax Code Section 2704 regulations

Receiving less publicity, proposed rules under section 2704 titled “Restrictions on Liquidation of an Interest for Estate, Gift and Generation Skipping Transfer Taxes” had garnered criticism for altering discounts used in assessing asset market valuations for gift-tax or estate purposes. The ultimate results of these changes would have been higher estate valuations and taxes.

They could have complicated the transfer of businesses and other family partnerships to the next generation. The IRS had come up with proposed changes in 2016. The curbs on discounts were called unworkable and the proposal received an avalanche of negative reactions.

Ultimately, the Treasury agreed the approach would prove unworkable. It will publish a withdrawal of the proposed regulations.

This highlights how tax regulations that affect legacy planning are complex and evolving. Because tax reforms will likely impact federal estate taxes, 2018 might be a good year for an estate plan review.

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