The Transitory Nature of the Estate Tax Exemption Amount

With $11.18 million of cover under the unified credit under the 2017 tax act, more estates than ever are exempt from federal estate tax. This is especially so for married individuals, who have double this amount and the benefits of portability to help make effective use of both spouse’s exemption amounts.

Clients need to be reminded that this exemption amount is NOT permanent. Come 2026, the exemption will return to pre-2017 tax act levels, adjusted for inflation. So the exemption will be cut in half (approximately). But it is not just the built-in changes that need attention – it is the political reality that if there is a change in power in Washington, there is a substantial likelihood that the Democrats would seek to lower exemptions even farther (and/or increase estate tax rates).

This was brought home recently via proposed legislation of Elizabeth Warren, a possible 2020 presidential candidate. A recent article notes:

Warren’s office says her bill would lower the exemption to what it was at the end of President George W. Bush’s administration in 2009 — $3.5 million for individuals or $7 million for couples — and tax the value above that threshold beginning at a rate of 55 percent. Warren’s bill also includes progressive, marginal estate tax rates with higher thresholds: 60 percent on anything over $10 million for an individual or $20 million for a couple and then 65 percent on anything over $50 million for an individual or $100 million for a couple. For estates worth more than $1 billion, all of those rates would be increased 10 percent across the board to 65 percent, 70 percent, and 75 percent, respectively.

Even if Congress and President Trump can make the 2017 tax act provisions “permanent,” there really is no such thing as permanent. A willing Congress and President can pass whatever changes they want in the future.

Planners and taxpayers alike ignore the of possibility of a reduced exemption at their own peril. At a minimum, consideration should be given in marital planning to what would be the best disposition plan at the death of the first spouse based both under current exemption amounts and what would be best if exemption amounts are materially lowered. Consideration should also be given to using the higher exemption amounts before they are rescinded (for those that can afford to do so).

3 things to know about Elizabeth Warren’s new housing bill