Rochester Business Journal

HSE Trusts and Estates attorneys Diana Clarkson and Graham Leonard contributed to the Rochester Business Journal's 2019 Guide to Wealth Management with their article, "Changes on the horizon for the federal estate tax?".  Read the article below, or click on the link at the bottom of the page to view it as a PDF.

Just when we were all getting used to the increased federal estate tax exemption, recent proposals from both sides of the aisle, and notably from several presidential hopefuls, suggest that the future of the federal estate tax is anything but settled.

These proposals range from lowering the federal estate tax exemption to $3.5 million and increasing the marginal rates to repealing the federal estate tax entirely.

As background, the Tax Cuts and Jobs Act of 2017 temporarily increased the federal estate tax exemption, which for 2019 is $11.4 million for individuals and $22.8 million for married couples. However, under the 2017 act, if Congress does not extend or make permanent the temporarily increased exemption, the exemption is scheduled to “sunset” to pre-increase levels on January 1, 2026, and would probably then fall in the range of $6 million for individuals and $12 million for married couples.

With the increased federal estate tax exemption, currently only the very wealthiest among us have federal estate tax concerns. The Tax Policy Center has estimated that less than 2,000 people are expected to have federally taxable estates in 2018. In other words, of all the people who died last year who are technically subject to the federal estate tax—U.S. citizens, permanent residents, and foreign nationals owning U.S. property—only the estates of 2,000 of them will actually have to file a federal estate tax return, and maybe even fewer will actually have to pay federal estate tax. 

But at least three proposals aim to change this. Sen. Cory Booker, D-N.J., Sen. Elizabeth Warren, D-Mass., and Sen. Bernie Sanders , I-Vt., have each introduced a separate bill that would lower the current federal estate tax exemption to $3.5 million, i.e., below even pre-increase levels. Although each bill would lower the federal estate tax exemption to the same amount, $3.5 million, each bill differs in the proposed marginal estate tax rates and the rationale for lowering the exemption.

Sen. Booker proposes lowering the federal estate tax exemption to help pay for the creation and funding of an “Opportunity Account” for every child born in the U.S. An Opportunity Account is essentially a government-funded, interest-bearing savings account that could only be used for specific purposes. To help pay for these Opportunity Accounts, Sen. Booker proposes the following marginal rates for the federal estate tax: 45 percent for taxable estates up to $10 million; 55 percent for taxable estates up to $50 million; and 65 percent for taxable estates over $50 million.

Sen. Warren’s federal estate tax proposal is tied to her affordable housing legislation. In September 2018, Sen. Warren introduced a far-reaching affordable housing bill that seeks to spend a half trillion dollars over 10 years on affordable housing programs. Sen. Warren proposes the following marginal rates for the federal estate tax: 55 percent for taxable estates up to $13 million; 60 percent for taxable estates up to $93 million; and 65 percent for taxable estates over $93 million. Taxable estates over $1 billion would be subject to a 10 percent special surcharge.

Finally, Sen. Sanders proposes increasing the federal estate tax to combat wealth inequality in the U.S. In support of his bill, Sen. Sanders stated in a press release that the estate tax “prevented self-made wealth from turning into inherited wealth and helped make America more equal.” Sen. Sanders proposes the following marginal rates for the federal estate tax: 45 percent for taxable estates up to $10 million; 50 percent for taxable estates up to $50 million; 55 percent for taxable estates up to $1 billion; and 77 percent for taxable estates over $1 billion.

Meanwhile, across the aisle, in late January 2019, Sen. John Thune, R-S.D., and dozens of his Republican Senate colleagues reintroduced a bill to completely repeal the federal estate tax, or, as they call it, the “death tax.” In a press release, Sen. Thune stated that the “death tax still remains an onerous and unfair tax that punishes hardworking families,” and in particular family farms and ranches. In support of the bill, Sen. Chuck Grassley , R-Iowa, stated that “Congress ought to do everything possible to encourage family enterprises to get next generations involved and keep the doors open for business.”

The proposals from the two sides of the aisle could not be more diametrically opposed. On the one side, Sens. Booker, Warren, and Sanders propose lowering the federal estate tax exemption and increasing its marginal rates, thereby expanding the reach of the estate tax. On the other side, Republican senators propose repealing the estate tax completely.

We cannot know whether either side will win or if the federal estate tax will simply remain as it is. One thing seems clear: the estate tax will remain a controversial issue in U.S. politics, and will likely feature prominently in the upcoming presidential election next year. Notably, Sens. Booker, Warren, and Sanders have already announced their candidacy for president.

For those readers wondering how to handle their estate planning now in light of this uncertainty, here are some suggestions.

First, as a baseline, you should continue monitoring these potential changes and the effect any such change may have on your estate planning.

Second, those whose estates would face federal estate tax if the exemption was lowered may want to “lock in” the currently increased exemption by making lifetime gifts now.

Finally, those who are in the market for an initial estate plan or who are considering revising an existing one should not wait until all this uncertainty about the estate tax is resolved to do so. These folks should consider building flexibility into their estate plans to account for this uncertainty instead. Fortunately, there are many ways that thoughtful estate planning can account for future changes in the estate tax.

view Changes on the Horizon for the Federal Estate Tax? as a PDF

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