As we have discussed in prior columns, the Tax Cuts and Jobs Act of 2017, signed by President Trump on December 22, 2017, made numerous changes to the taxation of trusts and estates. The 2012 “permanent” inflation adjusted $5 million estate, gift and generation skipping transfer tax exemption was doubled to $10 million indexed for inflation. The exemption for 2018 is $11.18 million. Consequently, most estates will not pay any federal estate taxes.
Married couples have it even better. The new tax act continues the portability feature for you married couples. This allows the estate of the first spouse to die to transfer his or her unused estate tax exemption amount to the surviving spouse. So married couples can transfer a total of $22.36 million of assets estate tax free.
The increase in the estate tax exemption amount under the new tax act, however, is only temporary. In order to be revenue neutral and comply with other federal laws, in 2026, the exemption amount returns to the permanent 2012 inflation adjusted $5 million exemption amount.
Well, how permanent is that 2012 inflation adjusted $5 million exemption amount? As we have seen in the past, it is only as permanent as the party in power. All you need is a majority of the House and Senate in Washington, and the President to agree, and you can change just about any tax law. As we have seen in the past, the folks in Washington can and do make changes to tax laws on a regular basis. They do need to justify their existence, you know.
Over the years, the exemption amount has increased in fits and bursts to the amount it is today. In 1997, the exemption amount was $600,000. And for one year, 2010, you could choose to not pay any estate tax for a death that year. If an estate did not pay any estate taxes in 2010, the heirs would have to pay capital gains taxes on the eventual sale of the estate assets.
The estate tax exemption amount has been a political football in Washington. Generally Republicans want to increase the exemption amount, and Democrats want to decrease the exemption amount. In the 2016 presidential election, the Democratic candidate campaigned on a platform to reduce the exemption amount to $3 million. So if there was a different result in the 2016 election, we may have been looking at a $3 million exemption amount instead of the $11.18 million exemption amount.
In 2012, the exemption amount was set to decrease, but it didn’t. It was surprising that a Democratic President and a Republican-controlled Legislature agreed to keep the exemption at the $5 million increased amount, peg it to inflation and make it “permanent.” What happened was, the Democratic administration wanted some legislation passed that didn’t have a snowball’s chance of passing in the Republican-controlled Legislature. So the administration and the Legislature did a “Let’s Make a Deal.” The administration got its legislation passed in exchange for the increased, permanent inflation adjusted exemption amount.
I was at a continuing professional education conference this past week and it was mentioned that many estate planners are amending the trusts of their clients with total assets under the exemption amount. These planners are removing A-B trusts, marital trusts, credit-shelter trusts and all other estate tax provisions from their clients’ trusts for the reason that in 2018 the estates are not subject to federal estate taxes. But is this the wisest course of action? Do you know what the tax laws will be in the coming years? Can you predict the future? I know I can’t. I don’t have a crystal ball.
I do not agree with those estate planners who are deleting estate tax provisions from their clients’ trusts. For most of my trust clients, I generally am not removing the estate tax provisions from their trusts. When it comes to trust instructions, I subscribe to the principle that more is better. I would much rather have more “what if” provisions and not use some of them, rather than having a situation with a client for which there is no provision in their trust. When such a situation arises for which there are no instructions in the trust, it typically costs time, hassle and money.
When you are gone don’t you want to give what you have, to whom you want when you want the way you want, all at the lowest predictable overall cost to those you love?
By Matthew M. Wallace, CPA, JD
Published edited September 2, 2018 in Savvy magazine, Port Huron, Michigan as: Estate tax exemption increase turns out not so permanent