Clients seem complacent about the federal estate tax since President Trump’s Tax Cuts and Jobs Act of 2017 increased the exemption to $11.4 million. A married couple, therefore, may shield as much as $22.8 million from the estate tax.
A lot of clients are quoting Mad Magazine’s Alfred E. Neuman, “What? Me worry?”
But don’t get too complacent.
That 2017 law sunsets in 2025, and may, in fact, be overturned sooner depending upon the results of the next general election.
If you read Bernie Sander’s proposed estate tax act bill, for example, the federal exemption would be lowered to $3 million. Further, his act would limit lifetime transfers to only $1 million before imposing gift tax. Under current law, you can consume your entire estate tax exemption during life as taxable gifts before having to pay gift or estate tax. Bernie’s law would make it that much more difficult to minimize the estate tax by making lifetime transfers.
While no one knows whether Bernie Sanders or any other similarly minded Democratic hopeful will win in 2020, and we also have no idea whether a new tax law would be forthcoming given the makeup of the House and Senate. It’s safe to say that there’s a voting block interested in wealth redistribution.
The current federal estate tax was enacted, in part, during the beginnings of our country’s industrial age to curb what was then viewed as economic inequality. Then-President Theodore Roosevelt (a Republican) was encouraged by wealthy families, the Carnegies among them, to enact the tax to curb the creation of an “elite, ruling class” made up of trust beneficiaries.
Sound familiar to today’s headlines?
The thought that the pendulum may quickly swing towards a harsher estate tax isn’t outside of the realm of possibilities. Is there anything that you can do about that now?
The answer is “Yes!”
While the federal exemptions remain high, you might want to consider advanced estate planning techniques that consume your exemptions now, prior to any changes in the law. One of the most common objections to making these gifts now is that the transfers must largely be irrevocable, meaning that they cannot be undone, and that in many circumstances the one who transfers loses the ability to use and enjoy the assets during his lifetime.
But there are exceptions to all these rules. There are certain kinds of trusts that you could create where you retain certain income rights for your lifetime. Further, if you are married, you can create marital trusts for your spouse that consume your current exemptions. They would pass on to your children upon your spouse’s passing estate and gift tax free.
Until recently, one concern about using your exemptions before the law changed centered on whether the IRS would “claw back” the gifts at your death if they were made during a time that the lifetime exemption was higher, but at your death would have been taxable. Recent proposed Treasury Regulations issued by the IRS appear to put that concern behind us. The IRS has indicated that it does not view current law as allowing “claw backs,” meaning that if you implement advanced estate planning techniques now, even if the exemptions should decrease, the IRS would not try to include those transfers in your estate upon your demise.
Lifetime transfers have a host of issues to consider, including whether you wish to retain the income or use of the assets transferred, who may serve as trustee, whether a technique would allow you to “leverage” your exemption, how your loved ones benefit and whether you could shield the trust assets for successive generations.
These are not issues that you should consider with someone who is not a wills, trusts or estates specialist. The Florida Bar deems board certified attorneys as specialists; no one else can use that title. In order to become board certified an attorney must demonstrate special skills in the area of law, pass a test, and take many hours of continuing, high level educational credits. A board certified attorney must become re-certified every five years.
Nevertheless, you have an opportunity now that may or may not be around much longer. If you have wealth above the $3-5 million range, it makes sense to visit your estate planning attorney sometime soon to consider your options.
© 2019 Craig R. Hersch. Originally published in the Sanibel Island Sun.