Since President Donald J. Trump took office, controversy surrounding his executive orders and cabinet appointments have muted attention to another polarizing issue—tax reform.
The news cycle is dominated by the drama of potentially repealing the Affordable Care Act, building a wall on the Mexican border and the ban on immigration from seven predominantly Muslim countries. All the while, tax reform flies under the radar.
When President Trump won the election in November—alongside Republican majorities in both houses of Congress—many analysts predicted sweeping tax law changes, including estate tax repeal. Repeal of the so-called “death tax” is a long-standing Republican policy goal, and appears in the 2016 House Republicans’ Blueprint for tax reform.
The estate tax is a political football—Republicans throw it one way; Democrats throw it the other. The current estate tax is 100 years old. Congress enacted it on the brink of World War I, and, in its first short iteration, the tax rates ranged from 1 to 10 percent.
Since that time, and especially in the modern era, the estate tax the subject of near-constant legislative change. The federal estate tax exemption and estate tax rates have changed (or been scheduled to change) in most years of my twenty-year practice.
The estate tax is coupled with a gift tax. Everything a person gives to another during lifetime, or leaves to others at death, is subject to the gift or estate tax. As of early 2017, the gift and estate tax rate is 40% of the value transferred.
However, there are several provisions that substantially reduce the effect of the estate tax on most taxpayers.
In 1995, when I began my legal career, the estate tax exemption was $600,000 per person. That means that any person who died owning a home, modest savings or an insurance policy could have a taxable estate.
If a person died owning property over that relatively low threshold, his or her executor would have to file an estate tax return, and tax could be due. Rates then topped out at 55%.
By 1998, the estate tax exemption was increased to $625,000, and it kept climbing. The top estate tax rate fell to 35% by 2010 and rebounded to 40% in 2013.
In the notorious year of 2010, the estate tax law “sunsetted” and estates could elect out of the estate tax. When George Steinbrenner, owner of the New York Yankees baseball team, died in mid-2010, many commentators estimated that his family avoided estate tax of $500 million to $600 million.
In 2011, the estate tax was reinstated, and under current law, a married couple can pass nearly $11 million transfer tax-free to their family and friends.
In contrast to 1995 law, the estate tax is now a problem of the very wealthy only. A 2015 report by the Joint Committee of Taxation stated that 0.2% of taxpayers who die (i.e., 1 out of 500) have a taxable estate.
For this reason, some planners believe estate tax repeal will not occur. Voters are less interested in estate tax repeal because most are not wealthy enough to be affected.
The estate planning bar’s top prognosticator, Ron Aucutt of McGuire Woods, believes that the Republican leadership will spend their political capital elsewhere. The Republican tax-reform Blueprint also proposes steep decreases in individual and corporate tax rates, issues with much broader application than the estate tax.
On Sunday, President Trump again promised that tax repeal will occur in 2017. Whether it involves estate tax law changes or repeal will probably involve a lot of Congressional horse-trading.
What continues to be problematic is the instability of the tax, and how a constantly changing tax law makes it difficult to create an effective estate plan. If repeal does occur, clients will need even more planning to protect against the fact that the estate tax will probably be back.
Michelle M. Huhnke is a partner with the Sugar Felsenthal Grais & Hammer law firm in Chicago and New York, focusing her practice on estate planning, charitable planning and wealth preservation. She works with clients and families to develop estate plans that address varied family circumstances and include efficient estate, gift and generation-skipping tax planning.
Huhnke helps individuals and families minimize estate and gift tax problems using a wide range of advanced techniques, including family partnerships, leveraged and discounted gifts and various gift trusts. She routinely helps clients administer estates and trusts by preparing federal estate tax returns and advising fiduciaries regarding family issues, tax problems, and their duties and rights.
She also advises clients on the use of charitable trusts, private foundations and donor advised funds to foster family philanthropy and maximize income, estate, and gift tax benefits of charitable giving.