FOR BETTER OR WORSE, IT SEEMS THE ESTATE TAX IS HERE TO STAY
Clients often end discussions of wealth transfer techniques with the question "Why am I doing this when it might not matter?" The question is certainly a fundamental question. No client wants to complicate his asset structure in preparation for an estate tax that may be repealed prior to his death. Why bother?
The answer is simple. It matters because the estate tax is here to stay.
The Economic Growth and Tax Relief Reconciliation Act of 2001 provided for an estate tax exemption of $675,000 in 2001 with annual increases, concluding with a $3.5 million exemption in 2009. The act also reduced the rate from 55 percent to 45 percent during the same nine-year period. The act eliminated the estate tax in 2010 prompting many to question whether unplugging grandma in 2010 was simply good tax planning. Absent further action, the 2001 act sunset in 2011, resulting in a $1 million exemption with a 55 percent rate. Reverting to a $1 million exemption was a tax crisis, and Congress had to act.
As usual, Congress chose to take its time, and waited until mid-December 2010 before finally passing the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Rather than reach a compromise position and add certainty to the law, Congress offered what could easily be called a gift to the estate planning industry and a potential nightmare for high net worth (and even moderate net worth) individuals.
The 2010 act raised the estate tax exemption to $5 million, dropped the rate to 35 percent, and, more importantly, increased the gift tax exemption to $5 million (up from $1 million). High net worth individuals were free to engage in more aggressive wealth transfers. At the same time, Congress merely punted the sunset to Dec. 31, 2012. Without additional congressional action, the dreaded sunset would occur on Jan. 1, 2013.
The "why bother" question was ever present in 2012. Congress had a clear obligation to take action and prevent the sunset. At the same time, the climate in Washington was so divided and partisan that inaction was a distinct possibility. A taxpayer could not safely gamble on a meeting of the minds in Washington and estate planners worked countless hours (but they, of course, counted the hours carefully) implementing strategies for their clients, including those clients that waited until Dec. 31 to act.
It turns out Congress did fail to act before the Dec. 31, 2012, deadline. The Senate addressed the issue late on New Year's Eve and the House followed on New Year's Day. President Barack Obama signed the American Taxpayer Relief Act of 2012 (ATRA) on Jan. 2, 2013. ATRA set the estate and gift tax exemption at $5 million, the rate at 40 percent, and indexed the exemption with inflation. Crisis averted.
Notably, ATRA does not contain any sunset provisions. It is the law of the land until Congress affirmatively acts to change it. The last 13 years prove that Congress only acts on the estate tax in a crisis, and there is no crisis on the horizon.
Congress will only talk about the estate tax when it absolutely must. Immigration reform, the minimum wage, fiscal policy, income tax policy, pension reform, NSA spying, our ongoing wars, Ukraine and the Bridgegate and IRS scandals are spicier topics with more voter appeal.
The statistics alone show that the estate tax impacts very few people. The population of the U.S. is about 300 million people. According to the Brookings Institution estimates, only 8,700 people will file an estate tax return for calendar year 2013 (about 0.003 percent of the population). Of the 8,700 estate tax returns filed, only about 3,800 of the returns will report estate tax due (about 0.001 percent of the population). No politician seeking reelection wants to spend time on an issue that impacts only the top 1 percent of the top 1 percent.
The estate tax is not even worth a politician's time from a federal revenue perspective. The 3,800 returns with tax due will pay a total estate tax of $14.2 billion. The total federal budgeted revenues for 2013 are $2.9 trillion, so the estate tax is only about 0.5 percent of federal revenues. Even worse, total budgeted expenses for 2013 are $3.8 trillion, so the estate tax is only paying for about 0.4 percent of the federal expenses. (Do not compare expenditures to the revenue or you will end up in one of those sexier issues.) There are fiscal issues with much broader appeal.
No matter what political rhetoric you hear, do not let the prospect of an estate tax repeal keep you from planning. If your assets exceed the exemption, the tax is far more important and impactful on your children then it is to anyone in Washington.