With large-scale tax reform being proposed in Washington D.C. by the Republican Congress, it’s important to understand how changes in our tax law would effect each of us, and specifically how it will effect estate planning.
What does this mean for me?
This past Thursday, November 2, 2017, Republicans in the House of Representatives released their version of a tax reform bill. This is the first draft of what could be the most comprehensive tax code revision in decades. The President has expressed his desire that tax reform legislation be passed before the end of this year.
If the estate and gift tax provisions in this bill as currently introduced become law, the trend since the Bush era tax cuts were first introduced in 2001 of subjecting fewer and fewer Americans to these taxes will continue.
By way of history, even though the Bush era tax cuts increased estate tax exemptions for persons dying through 2010 (even eliminating the estate tax itself for 2010 only), those exemption increases were scheduled to “sunset” on January 1, 2011. At that time the estate tax exemption was scheduled to roll back to its 2001 level of $1 million per person. This would have had the effect of bringing estate tax exposure to a large segment of the American middle class. However, in 2011 Congress passed and President Obama signed into law, legislation making the estate tax exemption $5 million per person, indexed for annual cost of living increases. In 2013 Congress and the President passed further legislation making the $5 million exemption “permanent”, meaning that there is no longer any provision of law that would “sunset” the exemption back to $1 million per person. With the cost of living kicker, the 2018 exemption under current law will be $5.6 million per person, or $11.2 million for a married couple. At these exemption levels, only .2% of estates are taxable.
Under the House bill, that .2% of taxable estates will be further reduced and eventually eliminated. Specifically, the bill would double the current estate tax exemption to $10 million per person, indexed for inflation since 2011, i.e. $11.2 million exemption per person in 2018 and a 2018 combined exemption of $22.4 for a married couple. Further, the estate tax would be repealed going forward for individuals dying in 2024 and beyond. For those persons who would still exceed the new exemption levels prior to estate tax repeal, the traditional planning methods to reduce estate taxes are not compromised under the new proposed tax bill. Also, the current estate tax rate of 40% on net worth over the exemption amount would remain the same.
For those persons who have planned to minimize estate taxes inter-generationally by skipping a generation to whom estate taxable assets are left, the Generation-Skipping Transfer Tax exemption would also be increased to $10 million per person, indexed for inflation, and the Generation-Skipping Transfer Tax would also be repealed starting in 2024.
One word about the gift tax provisions of the House bill. The gift tax is imposed on a person who gives away assets during lifetime. The basis for the tax is that an individual can hold onto his or her assets and pay an estate tax at death, or an individual can give away those assets during his or her lifetime and pay a gift tax at that time, which is imposed at exactly the same rate as the estate tax.
Under the House bill, the gift tax would not be repealed. It would stay in effect for 2024 and beyond. The rationale for this thinking, is that keeping the gift tax in effect will prevent wealthy individuals from gifting assets to younger family members in a lower income tax brackets, thereby reducing income tax revenue. There is also concern expressed that permanent U.S. residents who are not U.S. citizens would gift assets to family members living outside of the U.S. so that at death those assets would not be subject to U.S. estate tax. One compromise in the bill is that the current 40% gift tax rate would be reduced to 35% starting in 2024.
This is the first “salvo” so to speak on tax reform legislation. Keep in mind also that the GOP Act in its current form is still subject to revision before it goes to a House vote. And then there is the matter of a Senate bill which Senate Republicans have promised will be released later this week. So hang on and we’ll keep you up to date along the way.
Steven Spewak, JD, LLM
Attorney, AEGIS Professional Services