So it’s been a few years now and most middle-net worth folks are resting comfortably within the shelter of a federal estate and gift tax lifetime exemption of $5,430,000 per taxpayer. The exemption has exhibited a habit of increasing about a hundred grand each year – and when inflation really does rear its ugly head again, the robust increases it will generate in the exemption amount will allow most to go on accumulating transfer tax-free wealth until the cows come home.
Or so it would seem, but the responsible advisor will continually remind his or her clients that their sense of security requires a considerable measure of faith in elected officials who, in the past, have treated frequent and major tax laws change as part of their annual job description.
When discussion tends toward the “permanence” in the Internal Revenue Code brought about by the Tax Act of 2010, all it means it that there are no sunset provisions for any of the changes. Nothing proscribes the government regarding its ever-present power to tinker, temper, terminate or trash all that came in the Act or before. In fact, the wolves are always at the door.
Each year the President, through the Department of the Treasury, makes about 300 pages of proposals for the generation of additional revenue. Known as the Green Book, this publication has for several editions made no bones about the administration’s distaste for the current state of affairs regarding federal transfer taxes. Call the long wish list The Green Mile, which advocates a return to the 2009 parameters: 1) a top tax rate of 45% vs. 40%, 2) a total transfer tax exemption of $3,500,000 per taxpayer with no annual indexing for inflation, 3) a lifetime gift tax exemption of $1,000,000, i.e. only that much of the $3,500,000 could be used during life, and 4) a $50,000 limit on the number annual gift tax exclusions that could be used each calendar year (see https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2015.pdf, pp. 158 & 170).
And who knows that the Book may not be “Greener” in next year’s yard. As the national debt approaches $20,000,000,000,000 an administration may see fit to lower the exemption further and raise the top bracket to the 1980 level of 80%, and a less permanent Congress may be inclined to agree.
Just a couple fly-over considerations that ought to be part of an advisor’s ongoing dialogue with clients in this unstable tax environment:
- If it is affordable, keep any insurance in force that may be currently unnecessary for estate tax purposes (and if the law doesn’t change remember that no heir has ever been heard mumbling at a memorial service, “Gee whiz! Why did Mom have to leave us so much money?”) New coverage to replace a surrendered policy may not be available if the law does change.
- If it is affordable, consider buying anticipatory coverage while insurability is not an issue. The difficulty here is financial justification. At least one carrier allows justification assuming tax on the entire estate, sans lifetime exemption.
- Take advantage of the current ability to exercise the whole exemption amount during life, especially where control over the assets can be maintained, e.g. using family LLCs or spousal lifetime access trusts.
And lest you agonize morally over all this in the face of pronouncements by the likes of Warren Buffett and George Soros that it is the civic duty of others to pay even higher estate taxes, consider: 1) you are protecting property that has already been taxed at several governmental levels during life, 2) levy of the tax is a direct hit against invested capital currently creating jobs and revenue in the private sector, and 3) the tax is largely revenue neutral, created primarily to accomplish governmental redistribution of wealth.
‘Nuff said. Contact us about any tax planning issues that arise during your casework.