The Republican Tax Cuts and Jobs Act is now law. It overhauls much of the federal tax code, including the Estate Tax, often referred to as the “Death Tax.”
What is the Death Tax?
The Death Tax is a tax on inheritance. However, the Death Tax does not apply to every estate. Decedents who leave inheritances to their spouses who are U.S. Citizens do not have to pay any Death Tax. This is often referred to as the unlimited marital deduction. Furthermore, estates that are below a specified value, the “Estate Tax Exemption,” are also excluded.
What is the Estate Tax Exemption?
The federal Estate Tax Exemption has changed over time. In 2001, the Estate Tax Exemption was $675,000. This meant that estates of that value or less did not have to worry about the application of the Death Tax at all. Estates larger than that amount had to pay significant tax on the amount over the Exemption.
The “Economic Growth and Tax Relief Reconciliation Act of 2001,” also known as “EGGTRRA,” increased the Estate Tax Exemption over time as follows: $1,000,000 in 2002; $1,500,000 in 2004; $2,000,000 in 2006; and $3,500,000 in 2009. EGGTRRA eliminated the estate tax in its entirety in 2010, but originally scheduled to lower to exemption back to $1,000,000 in 2011. This “yo-yo” effect of the Estate Tax Exemption increasing, going away, and then returning, made it difficult to plan.
Congress subsequently passed the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” to temporarily increase the Estate Tax Exemption to $5,000,000, adjusted for inflation, for decedents dying in 2011 and 2012. The legislation once again lowered the Estate Tax Exemption to $1,000,000 for decedents dying in 2013.
On January 1, 2013, Congress passed the “American Taxpayer Relief Act of 2012.” The Act kept the Estate Tax Exemption at $5,000,000, adjusted each year for inflation, indefinitely. After so many years of uncertainty, it seemed as if the Estate Tax Exemption was finally settled.
What Does the New Legislation do to the Death Tax?
The Tax Cuts and Jobs Act of 2017 doubles the federal Estate Tax Exemption to $11,000,000 per person, adjusted each year for inflation, beginning for decedents dying in 2018 through 2025. Under the legislation, what happens for decedents dying after 2025? You guessed it – it reverts back to the 2017 level of $5,000,000 adjusted for inflation!
Will Congress pass additional legislation ahead of 2025 to make the $11,000,000 Estate Tax Exemption permanent? Will Congress try to increase the Exemption further? Will Congress decrease the Estate Tax Exemption to pre-2010 levels? Will Congress finally abolish the Estate Tax altogether? If we have learned anything over the course of the past twenty years, the federal Estate Tax will likely be in a constant state of flux.
How to Plan?
The best method for planning for this uncertainly is to build an estate plan that is flexible and has as many “on-ramps” and “off-ramps” as possible.
Married couples who want their estate plans to remain revocable upon the death of the first spouse should consider setting up “disclaimer trusts” that also have provisions allowing the successor Trustee to claim the deceased spouse’s Estate Tax Exemption upon the death of the first spouse.
Married couples who want to limit the surviving spouse’s ability to amend the trust after the death of the first spouse should consider setting up a “Clayton Election Trust” that allows the surviving spouse to choose the tax treatment of the irrevocable portion of the trust upon the death of the first spouse.
All clients should consider including provisions for Trust Protectors that would allow the modification of a trust even after it has technically become irrevocable after the death of the Trust-Maker to allow for the modification of the trust’s administrative and tax provisions without court involvement.
All clients should also consider “trust decanting,” allowing a trustee to pour assets from an old, outdated trust into a new and improved trust for the benefit of the same beneficiaries.
No matter how unpredictable Congress can be, a comprehensive and flexible estate plan that is able to navigate changes in circumstances can be invaluable.
KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205.
Disclaimer: This article is for general information only. Reading this article does not establish an attorney-client relationship. Before acting on any of the information provided in this article, you should consult a competent attorney who is licensed to practice law in your community.