Estate Taxes – Here We Go Again

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Scott Roberts, CPA, CLU

In 2001, then-President George W. Bush, with the aid of a Republican-led House and a Republican-led Senate, signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001, known as EGTRRA and pronounced “egg-tra” or “egg-terra”.  Although, most people just called it the “Bush Tax Cuts”.  The unified credit exemption equivalent amount was $675,000 per person (and scheduled to go to $1 million) but the act gradually increased that amount to $3.5 million by 2009 (while also lowering the tax rate from 55% to 45%) and then completely eliminated the estate tax in 2010.

Of course, as most know, that repeal proved illusory because the act also included a “sunset” provision which meant that on January 1, 2011 the law reverted back to the $1 million exemption and 55% tax rate.  Or at least it would have were it not for a backroom deal that increased the exemption to $5 million and lowered the rate to 40%.  That “fix” was also temporary and was set to expire after 2012 but the American Taxpayer Relief Act of 2012 (ATRA) made the exemption and rate permanent and even indexed the exemption to inflation.


So why the history lesson?  Well, because while previous bipartisan negotiations and lawmaking led to a permanent law around which everyone could plan, and which even accounted for inflation, we now have an uncertain situation almost identical to 2001.  The current tax bill will double the inflation-adjusted exemption from $5.6 million to $11.2 million per person, meaning that a married couple can pass up to $22.4 million without incurring any estate taxes.  This is very good news for our clients who have successfully accumulated assets and wish to pass them on.  The problem is that the higher exemption amount, just like the EGTRRA provisions, “sunsets” in 2026 and reverts back to the permanent ATRA exemption of $5 million plus inflation.  So, unless somebody plans to die within the next 8 years, the new tax law doesn’t do anything for them on the estate tax front.  Sure, there is a chance that a future congress could vote to make the increase permanent.  But there is just as likely a chance that they will let it expire (after all that doesn’t require any legislative effort) or even decrease the exemption as some Democrats want to do.  Ultimately, it will depend a lot on who has the majority in the House and Senate going forward.


So how do we plan?  This is the “here we go again” part.  Just like in 2001 through 2011, the first step is to accept that there will be an estate tax, we just don’t know exactly what the exemption will be or what the rate will be.  But we do know what the exemption will be in 2018 – $11.2 million – which offers a huge planning opportunity to use that exemption, before it “expires”, through a Spousal Lifetime Access Trust (SLAT) or other planning vehicle.  Beyond availing oneself of the currently increased exemption, projections can be created to forecast an estimated estate tax liability, even utilizing multiple assumptions as to the future exemption.  Then, further steps to avoid or reduce that tax, as well as shift future growth, can be made.  Finally, once effective planning has been implemented, or at least decided upon, a sober assessment is required of the options available for funding the resulting tax.


For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.

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