One of the elements of the House's recent tax proposal is a future repeal of the federal estate tax.
By this point, most people have seen press reports about tax proposals in Congress that promise significant changes to individual and business taxes. The House’s proposal, titled the “Tax Cuts and Jobs Act,” was introduced to Congress on November 2 and is in the early stages of its legislative journey through the House of Representatives and the Senate. Prospects for the adoption of all, some or any of its current components remain unclear.
One of the elements of the proposal in its current form is a future repeal of the federal estate tax. Specifically, it calls for the following changes to the U.S. estate and gift tax system:
If you’re experiencing déjà vu, you can’t be blamed – in 2001, Congress passed the “Economic Growth and Tax Relief Reconciliation Act,” which similarly increased the estate tax exclusions and repealed the estate tax at a future date (2010). Between 2001 and 2009, the estate tax exclusion soared from $675,000 to $3.5 million, and for estates of persons dying in 2010 there was a 0% estate tax. Estate tax had effectively been repealed – but the change was short-lived. Under the December 2010 “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010,” estate tax returned in 2011 and has been with us ever since.
There may still be an estate tax in effect at the time of your death. We’ve had an estate tax in effect in the U.S. since 1916 – prior to the entry of the U.S. into World War I. Even if the House’s proposal is adopted and no changes are made through the 2024 repeal of the estate tax, there is no guarantee that estate tax will stay repealed in the future.
Although estate tax repeal may be illusory, a substantial increase in the gift tax credit would be real. The current proposal would immediately double the amount of the gift tax credit, from $5.6 million per taxpayer in 2018 to $11.2 million – meaning a married couple would be able to transfer $22.4 million free of the federal gift tax. From 2001 to now, as these exclusions have increased, affluent individuals have taken advantage of them by making gifts to “lock in” the use of the exclusions. If the House’s proposal is enacted and the exclusion is dramatically increased once more, expect to see a new rush by wealthy families to make more large gifts to family members and long-term trusts.
The Urban-Brookings Tax Policy Center has estimated that in 2017, about $20 billion dollars in Federal estate tax will be paid by the estates of approximately 5,400 decedents.
Flexible, long-term trusts will become even more important in the planning of wealthy families. Over the past decade, as estate and gift tax credits soared, families have poured assets into long-term trusts that are structured to shelter wealth from taxes and liabilities for successive generations in a family. These long-term trusts have often become the “family banks” that finance business endeavors and hold growth investments for a family. If another dramatic increase occurs in the gift tax credit, expect these long-term trusts to gather even more wealth in the years to come.
States that impose estate or inheritance taxes may have a harder time retaining wealthy residents. Nineteen states impose either an estate or an inheritance tax on their residents, with top rates reaching 20% in some jurisdictions. If the Federal estate tax is repealed, it may become even harder for these states to keep wealthy residents from moving to other states where estate taxes can be avoided entirely.
Of course, proposed legislation is just that – proposed. Planning experts and taxpayers alike will continue to watch with interest in the coming weeks to see how the proposal plays out.
Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James financial advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.