The Federal Estate Tax is everchanging, with the applicable Federal and state laws being modified many, many times over the years. And they are certain to change again and again, with possible changes happening under the incoming Biden presidential administration and a possible change in control of the Senate (depending on the outcome of Georgia’s historical run-off votes in January).
The Present and Future of the Federal Estate Tax Law
As such, we cannot know exactly what to expect with respect to the Federal Estate Tax beyond 2021, other than it will continue to change over time.
The Tax Cuts and Jobs Act of 2018 (the “TCJA”) doubled the exemption from previous levels, and the IRS has already announced that the gift and estate tax exemption amount for 2021 will be $11.7 million per person and $23.4 million per married couple. However, as of now, the TCJA exemptions only run through 2025. At the end of that year, the increased exemption amounts are set to automatically sunset and will return to $5 million (adjusted for inflation).
Additional contemplated changes include a proposed increase in the capital gains tax rate for individuals earning over $1 million to 39.6%, and elimination of the “step-up in basis” provision in the tax code.
Estate planners must therefore anticipate and respond to constant and repeated change. As we look to the near future and any alternative tax plans that Biden’s administration may implement regarding the taxation of estate assets and of capital assets, potential planning may be warranted.
Tax Laws and Estate Planning
When developing and updating your estate plan, you must consider these conditions. You should understand the Federal Estate Tax laws (and other tax rules) as they are now. Then, you must also look ahead and recognize that tax law will continue to change. Certain adjustments can be anticipated in advance, while others may require action when changes happen (that is, when the new law becomes known and enacted).
This is why it is so important to review and revise your estate plan on an annual basis. Your life changes. Your financial situation may be different from one year to the next. Your family life may change, with births, death, divorce, a new job, or another life-changing event. Even if your life is basically the same from this year to the next, tax laws, interest rates, property values, and other factors could be different and will directly affect the details of your estate plan or tax plan.
Estate Tax Planning at The Law Offices of Thomas D. Glascock
For help with developing and updating your estate plan, contact me today. Estate planning is my primary specialty as an attorney. Let me help you make sound legal decisions that will benefit your future, your legacy, and your family’s financial well-being.
To give you an idea of how the Federal Estate Tax has changed throughout the years, I have compiled this brief history of changes both suggested and made to it.
- The current estate tax was first enacted by the Revenue Act of September 8, 1916, on the brink of the United States’ entry into WWI. It imposed a 1% to 10% tax on estates exceeding $50,000.
- The Act of March 3, 1917, increased tax rates by one-half, from 1.5% to 15%.
- The Revenue Act of 1926 raised the state death tax credit to 80% of the basic tax.
- On February 5, 1969, less than 2 weeks following President Nixon’s inauguration, Congress published the Treasury Department’s multi-volume “Tax Reform Studies and Proposals,” which proposed a wide variety of estate and gift tax changes.
- On January 17, 1977, during the last week of President Ford’s administration, the Treasury Department published “Blueprints for Basic Tax Reform,” which proposed sweeping changes to dramatically broaden the available tax base.
- On November 27, 1984, three weeks following President Reagan’s re-election, the Treasury Department published “Tax Reform for Fairness, Simplicity, and Economic Growth,” which proposed sweeping changes to the tax system.
- During 1985, the White House published “The President’s Tax Proposal to the Congress for Fairness, Growth, and Simplicity,” which essentially provided a rough model for the subsequent Tax Reform Act of 1986.
- The Tax Reform Act of 1986 enacted a supposed simplified Generation Skipping Transfer Tax (“GST Tax”), but at a rate of 100% (not the previous 80%) of the top estate tax rate.
- The Omnibus Budget Reconciliation Act of 1987 added estate freeze rules.
- During 1990, the above described estate freeze rules were repealed and replaced with the rules of Chapter 14.
- The Clinton Administration’s 1999 budget proposals proposed eliminating non-business valuation discounts.
- The Economic Growth and Tax Relief Reconciliation Act of 2001 imposed a variety of changes to the estate, gift and GST taxes.
- Throughout 2001 to 2006, the Bush Administration and the Republican Congressional leadership lead several efforts to repeal or reform the estate, gift, and GST tax systems.
- The Permanent Estate Tax Relief Act of 2006 was passed by the House, which proposed changes to the estate, gift, and GST tax systems.
- On July 29, 2006, the House passed the “Estate Tax and Extension of Tax Relief Act of 2006,” which also proposed changes to the estate, gift, and GST tax systems.
- On July 27, 2005, the staff of the Joint Committee on Taxation published “Options to Improve Tax Compliance and Reform Tax Expenditures,” which made five proposals designed to raise revenues and which concerned perpetual dynasty trusts, valuation discounts, lapsing crummy powers, a consistent basis, and 529 plans.
- The 2008 and 2009 Congressional budgets each proposed changes to the estate, gift, and GST tax systems.
- The 2010 Tax Act increased the exemption from the estate, gift, and GST taxes to a then historically high of $5,000,000, reduced the tax rate on estates and gifts exceeding $5,000,000 to an historically low 35%, and for the first time permitted the portability of any unused estate tax exemption to the surviving spouse. The act was set to expire on December 31, 2012.
- The American Taxpayer Relief Act of 2012 established a “permanent” exemption of $5,000,000 (indexed for inflation after 2011) and a “permanent” flat tax rate of 40% on all taxable transfers above the exemption amount. It also made portability “permanent.”
- In 2013, individuals, estates, and certain trusts became subject to the Affordable Care Act’s 3.8% tax on investment income above a threshold amount ($11,950 of taxable income in 2013, and $12,150 of taxable income in 2014). For individuals, the same threshold is $200,000 for single filers and $250,000 for joint filers.
- The Tax Cuts and Jobs Act of 2017 (TCJA) made several significant changes to the estate and gift tax AND individual income tax. These changes include increasing the estate tax exemption amount from $5.6 million to $11.2 million (and $22.4 million for married couples), a nearly doubled standard deduction, new limitations on itemized deductions (including a $10,000 per year limited deduction for property taxes plus state income or sales taxes, but not both), reduced income tax rates, and additional changes.
- The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act), contained important tax changes, designed to deliver speedy relief to businesses and individuals struggling due to the COVID-19 pandemic. These included a waiver of the 10% penalty on early withdrawals from retirement accounts or up to $100,000 of distributions for coronavirus-related purposes made on or after Jan. 1, 2020, the waiver of the Required Minimum Distribution rules for certain defined contribution plans and IRAs during 2020, favorable rules for cash contributions made during 2020 to certain charities, and permitting employees can exclude up to $5,250 from income for student loan repayments made by an employer after March 27, 2020, and on or before Dec. 31, 2020.
As with the federal estate tax law, the New York estate tax and related laws have undergone several recent changes in the past decade:
- On June 24, 2011, the Marriage Equality Act was signed into law, which became effective July 24, 2011 and made same sex marriage legal in New York State. With passage of the Act, same sex spouses in same sex marriages were granted the same property rights in each other’s estates as spouses have in opposite sex marriages. However, this being a New York State law, the rights granted under it are limited to those matters governed by New York law.
- During 2013, New York amended its estate tax law to eliminate the qualified domestic trust (frequently referred to as QDOT) requirement for estates too small to need a federal estate tax return (that is, estates under $5,340,000 during 2014).
- The New York Non-Profit Revitalization Act of 2013, which took effect July 1, 2014, substantially modified the state law for not-for-profit corporations and charitable trusts.
- Major changes to the New York Estate and Gift Tax law were made by the Executive Budget, which was adopted by the State Legislature and became effective on April 1, 2014. These changes increased the New York exclusion amount, with gradual increases until the New York exclusion matches the federal exclusion. After January 1, 2019, the New York exclusion is indexed for inflation, such that it will continue to match the federal exclusion. The adopted Executive Budget also repealed the New York GST tax. Conversely, while New York has no gift tax, the adopted Executive Budget provides that taxable gifts made by a New York resident after April 1, 2014 and within 3 years of death are added back into the taxable estate for taxation purposes; however, this does not include any gifts made within the annual exclusion amount (that is, for 2021, $15,000 or $30,000 for married couples). Moreover, the adopted Executive Budget did NOT adopt portability; so New York State will not permit the portability of any unused estate tax exemption to the surviving spouse for the purposes of exemption from New York estate tax.
