By James A. Carolan, CWS®, CTFA Sr. Estate Planning Attorney for EWM Legal Services
Nothing Can Be Said To Be Certain
Except Death and Taxes.
Benjamin Franklin, November 13, 1789
The only difference between death and taxes is that death doesn’t get worse every time Congress meets.
Will Rogers
These quotes are particularly apt today. Congress is debating tax law, and change is coming. Some changes will happen automatically. That is the one certainty that I can give to any estate planning client – tax law will change.
Today we are faced with the incredible shrinking estate tax exemption, even if Congress does nothing. The Tax Cuts and Jobs Act of 2017 (TJCA) led to the increased exemption worth $11,700,000 for each person today. However, many of the TJCA provisions are affected by sunset provision, including income tax provisions and the estate and gift tax exemption.
For our discussion, I am only reviewing the estate and gift tax exemption issues.
The TJCA doubled the estate tax exemption moving it from $5,600,000 to $11,200,000 in 2018. It also tied the exemption to inflation, which yielded our 2021 exemption of $11,700,000. Without the TJCA effect, the exemption likely would be about $5,850,000 today.
The IRS released the 2022 inflation-adjusted rates on November 10, 2021: the new gift tax exemption increase to $16,000 (from $15,000) and estate tax exemption increased to $12,060,000 from $11,700,000). This assumes that Congress doesn’t change the law on us as is being discussed.
On January 1, 2026, however, the exemption reverts to $5,000,000, adjusted for inflation. The estimate today is that it means between $6,000,0000 and $7,000,000 as the exemption for 2026.
The sunset provision does not affect portability, however, and that remains in the tax code today. Portability was made permanent in the American Taxpayer Relief Act of 2012 (ATRA).
Portability means that the estate tax exemption is double the stated amount (i.e., today, a married couple can protect $23,400,000 from estate taxes). Using portability requires filing an estate tax return (Form 706) and electing the “Deceased Spouse’s Unused Exemption” (DSUE) to be ported to the surviving spouse. With the incredible shrinking exemption, we recommend filing the estate tax return as a hedge against future growth and future reductions in the estate tax exemption if the surviving spouse’s estate is near or likely to exceed the prospective exemption amount.
For example, a spouse dies this year with an estate of $5,000,000. The surviving spouse has $4,000,0000 of assets in their own trust. No estate tax would be due, and no 706 is required since the deceased spouse has less than $11,700,000. The DSUE is $6,700,000. If we file the 706 to elect portability, the surviving spouse now has an available estate tax exemption of $18,400,000.
When the sunset hits January 1, 2026, the surviving spouse will have an available exemption of $12,700,000 ($6,000,000 at the anticipated exemption amount at sunset and the $6,700,000 DSUE).
In addition to the sunset that is coming, discussions are going on now to change the estate and gift tax exemption. Senator Sanders introduced the “For The 99.5% Act,” which would accelerate the sunset date. It would not just accelerate that sunset; however, it also seeks to reduce the exemption to $3,500,000. If, and that is a very big IF given the make-up of the House and Senate today, this act was to pass, the DSUE in our example above becomes more critical. In that scenario, our surviving spouse with the $4,000,000 estate would face estate taxes due on the $500,000 excess. However, with the DSUE applied, the surviving spouse would have an available exemption of $10,200,000 ($3,500,000 plus $6,700,000 DSUE).
Senator Sanders isn’t the only one with a proposal. The House Ways and Means Committee released its recommendation on September 13, 2021, as part of the funding for President Biden’s “Build Back Better Act.”
In this proposal, the sunset is also accelerated. After December 31, 2021, the estate tax exemption would be reduced to $5,000,000 per person or $10,000,000 per couple. If the indexing to inflation holds, the amount is expected to come in near $6,000,000 for gift and estate taxes.
The House Ways and Means Committee proposal does affect many of the advanced planning techniques we use for gifting purposes.
Where the Trust maker is deemed the trust owner for income tax purposes (the Intentionally Defective Grantor Trust – “IDGT”), the assets will be included in that person’s estate. An existing IDGT would not be affected by that proposal. Another popular tool for shifting future growth out of the estate, the Grantor Retained Annuity Trust (GRAT), would become ineffective because leveraging of the gift would be lost, and adverse income tax effects would be recognized.
Due to the pending changes in tax law, anyone considering a gift for estate tax planning would be wise to consider establishing that plan, and funding it, BEFORE December 31, 2021. Today a total of $11,700,000 per person is available. So far, nothing in any of the proposals includes a clawback provision. This means that a gift over $6,000,000 will take advantage of current law and capture this historic high exclusion amount. Estates under $6,000,000 will leave you with only the difference between the gift amount and your then exemption amount of $6,000,000.
If you haven’t done your estate planning yet, now is the best time – while you still can. If you have your estate plan in place, now is an excellent time to review and update your plan.
James A. Carolan may be reached at 248.924.3129 or jcarolan@ewm-legal.com.
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