The Tax Cuts and Jobs Act (TCJA) doubled the federal gift and estate tax exemption amount from $5 million to $10 million, adjusted annually for inflation. Combined with the unlimited marital deduction and other estate tax provisions, including portability of the exemption, a married couple can easily shelter more than $20 million from federal estate tax.
As a result, the need to incorporate estate tax planning strategies into an overall estate plan has been eliminated for everyone other than Hollywood celebrities, professional athletes and Fortune 500 CEOs ― right? Wrong. Your plan should address estate tax concerns for both today and the future.
Evolution of estate tax laws
The estate tax system has undergone a radical transformation since the turn of the century. Notably, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 featured a number of favorable changes for families.
For starters, EGTRRA gradually reduced the top estate tax rate from 55% to 35%, while simultaneously increasing the effective exemption amount from $1 million to $3.5 million. EGTRRA also provided a complete “repeal” of the federal estate tax, but only for one year — 2010. The estate tax was reinstated in 2011.
Subsequent federal tax legislation — including the American Taxpayer Relief Act (ATRA) of 2012 and the Protecting Americans from Tax Hikes (PATH) Act of 2014 — established and preserved a $5 million estate tax exemption, indexed for inflation, and a top 40% estate tax rate. Among other changes, a portability provision allowed the estate of a surviving spouse to use the remaining balance of the deceased spouse’s exemption, and this provision was then made permanent.
Finally, the aforementioned TCJA doubled the $5 million exemption to $10 million, indexed for inflation. The indexed figure for 2019 is $11.40 million. Corresponding changes apply to the generation-skipping transfer tax exemption. Bear in mind that, without further legislation, the estate tax exemption will return to an inflation-adjusted $5 million in 2026. And therein lies the rub.
Reasons for estate planning
It’s clear that, during the past two decades, Congress has had no reservations about revising estate tax laws, even when certain provisions are “permanently” incorporated into the tax code. Depending on the outcome of the next few elections, lawmakers might undo some of the favorable estate tax provisions on the books or at least reduce the benefits. In that case, estate tax planning becomes more significant for a larger segment of the population.
Furthermore, if the law is untouched, the latest increase in the gift and estate tax exemption is only temporary. It’ll revert to the $5 million figure after 2025, with inflation indexing. When you consider that your assets are likely to appreciate substantially in value by then, exceeding the exemption threshold isn’t as farfetched as it may seem today.
Note also that estate tax laws often differ at the state level. Despite the generous federal exemption, your family may have to contend with state estate taxes that can erode your wealth.
Finally, your personal circumstances will change over time. For example, a marriage, divorce or large inheritance will require a review of and, possibly, revisions to your estate plan.
The time for action is now
To best prepare for any future estate tax law changes, include language in your will, and your spouse’s will, that provides the maximum estate tax protection for your family. Your will can be structured to take advantage of the maximum exemption available on your death.
Coordinate this with other estate planning documents, such as testamentary trusts. Your estate planning advisor can help you with the details. Remember, the estate tax laws aren’t forever, so you must continue to monitor developments and adapt to any changes.
