Background of Estate Tax Law
The modern estate tax dates back to 1916 when it was imposed at a rate of 10% on the portion of estates above $50,000. Over the following years, the rates and exemption amounts varied, reaching a high of 77% with a $60,000 exemption amount from 1941 to 1976.
In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), the first of the two large legislative packages that contain most of what was then commonly referred to as the “Bush tax cuts.“ EGTRRA gradually lowered the maximum estate tax rate and substantially raised the applicable exclusion amount over the years 2002 through 2009. The maximum tax rate fell from 60% under prior law in 2001 (a 55% marginal rate on taxable estate values over $3 million-plus a 5% surtax from $10 million to $17 million) to 45% in 2007-2009. EGTRRA repealed the estate tax completely for decedents dying in 2010.
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“2010 Act”)
The federal estate tax, which disappeared for 2010, sprung back to life in 2011. During 2011 and 2012, the top rate was 35%. For 2011, the exemption amount was $5 million per individual (indexed for inflation after 2011). The estate and gift tax exemptions were reunified starting in 2011, which meant that the $5 million estate tax exemption was also available for lifetime gifts. The gift and estate tax rate was 40% starting in 2011.
The exemption from the generation-skipping tax (GST) – the additional tax on gifts and bequests to grandchildren when their parents are still alive – rose to $5 million and the GST tax rate for transfers is the same 40% as for gift and estate taxes.
From a planning standpoint, a nice feature of the 2010 Act was that it made it easier to transfer the $5 million exemption to a surviving spouse, so married couples could shield $10 million of their assets from taxes. In the language of tax professionals, the estate tax exemption was “portable.”
As a result of the exclusion being increased each year due to indexing, the exclusions had been increased to $5,490,000 as of January 1, 2017.
The TCJA is basically a continuation of the 2010 Act relative to estate, gift, and generation-skipping transfer taxes, with one exception. The exclusion is increased from $5,490,000 to $11,200,000 per individual ($22,400,000 for married couples) with continuing annual indexing increases. The top tax rate continues to be 40%.
Current Planning Considerations
If you are married, your estate is below the exclusion amount ($22.4 million) and you have not already done so, you should consider amending your plan to take advantage of the portability rule referred to above. If your will or trust provides for the establishment of a “Bypass Trust” on the first death, you can eliminate that provision and instead leave all of the assets to the survivor without negative estate tax consequences. The advantage is that the survivor of a married couple is left with all of the assets in a single revocable trust, rather than one or two irrevocable trusts. Many of our clients have liked the idea of the simplicity and flexibility of having a single revocable trust on the first death. Many others like the idea of the certainty of the first decedent’s share of the couple’s assets going into one or two irrevocable trusts on the first death and then to the beneficiaries designated by the first decedent on the second death. We have learned over the last couple of years that there is no “one size to fit all” when it comes to this decision.
In addition to the estate and gift tax law changes described above, there are a number of state and federal laws that have been passed over the past several years since we mailed a letter like this to our clients. Those changes fall into two broad categories. First, privacy concerns and second, dealing with electronic assets. As you are probably aware, a number of new laws have passed over the last several years that deal with the protection of personal privacy. That means that it is much more difficult to get information about a loved one who may need assistance dealing with financial and/or medical issues. The result is that we have added language to our estate planning documents that make it easier for a fiduciary to get that information. Fortunately, we have not run into situations where an agent and/or successor trustee has been denied information using documents that do not contain the recently added language, so we are only suggesting updating your documents if there are other reasons to do so. Similarly, we have not had any experiences with a fiduciary’s inability to access electronic records with our existing documents, so are only adding the updated language where other reasons dictate that the documents be updated. If that situation changes, we will let you know.
The bottom line is that the changes in the tax and other laws, in our opinion, have not been enough to cause us to call for an automatic update of the estate planning documents that we have prepared over the years. However, we do think it is important for all of our clients to take a quick look at their estate planning documents and think about bringing those documents up to date if taking advantage of the portability rule makes sense to you and/or personal circumstances have changed from when your estate planning documents were executed.