Since President Donald J. Trump took office, the controversy surrounding his executive orders and cabinet appointments muted attention to another polarizing issue—tax reform.
This drama about potentially repealing the Affordable Care Act dominates the news cycle. Then you have the drama about a wall on the Mexican border. The ban on immigration from seven predominantly Muslim countries is big news. 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. In its first short iteration, the tax rates ranged from just 1 to 10 percent.
Since that time, and especially in the modern era, it’s been the subject of near-constant legislative change. The federal estate tax exemption and estate tax rates changed (or been scheduled to change) during most years of my twenty-year practice.
The estate tax couples with the gift tax. Everything a person gives to another during lifetime (or leaves to others at death) gets subjected to the gift or estate tax. As of early 2017, the gift and estate tax rate is 40% of the value transferred.
Several provisions substantially reduce the effect of the estate tax on most taxpayers.
In 1995, my legal career began, 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 Congress increased estate tax exemption 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. Consider George Steinbrenner, owner of the New York Yankees baseball team. When he died in mid-2010, many commentators estimated that his family avoided estate taxes of $500 million to $600 million.
In 2011, Congress reinstated the estate tax. 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 on 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 Huhnke is a Partner at Sugar Felsenthal Grais & Hammer LLP. She focuses her practice on estate planning, charitable planning and wealth preservation.
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