by Richard M. Morgan

Estate planners are life-long learners, as we need to keep up with ever changing laws, especially tax laws. Because we deal with constant change, we often yearn for stability in the law, regardless of the laws being good or bad from a public policy perspective. Well, we got some stability beginning in 2013, from the passage of the 2012 Tax Act. It was nice, but it did not last. We are now living with the 2017 Tax Act, which is beneficial to most people. However, this Act’s effect on wealth transfer taxes and income taxes on individuals are only temporary, as they go away after December 31, 2025.

Here is where we are today as to the wealth transfer (estate, gift and GST) taxes. The exemptions are by far the highest they have ever been. Specifically, $10 million indexed for inflation ($11.4 million in 2019), and with “portability,” so a married couple can benefit from two (estate and gift tax, but not GST tax) exemption amounts (up to $22.8 million in 2019) if the proper estate tax return (IRS Form 706) is filed timely after the first spouse’s death. However, beginning on January 1, 2026, the rules under the 2012 Tax Act come back, giving us exemption amounts of $5 million indexed for inflation (likely about $6 million in 2026) along with “portability” so a married couple can benefit from two (estate and gift, but not GST tax) exemption amounts (up to about $12 million in 2016). Under both current law and the law to come back in 2026, the tax rate on wealth transfers over the exemption amount is 40%. Of course, these rules only apply until Congress enacts a new law saying otherwise.

So, what is new? Both Republicans and Democrats are talking a lot lately about changing these rules!

Republicans reintroduced legislation to permanently repeal the estate tax. The bill is called, “Death Tax Repeal Act of 2019.”

Democrats, so far, have not introduced legislation, but have different ideas on how to get more tax out of (what they call) the wealthy. Senator Elizabeth Warren has discussed creating a 2% annual wealth tax on those with assets valued at over $50 million and with this annual tax rate increasing to 3% for assets valued at over $3 billion. Senator Bernie Sanders wants to roll the wealth tax exemption amounts back to what existed in 2009, but with increasing tax rates. Specifically, $3.5 million exemption amounts with rates starting at a 45% and rising to 77% for wealth transfers over $1 billion.

So, what should we make of these proposals, and what do we think the odds are as to what may happen by the end of 2025? Please be advised that these are the personal feelings of the author after practicing in this legal field for over 30 years and not in any way scientifically based.

First, what is the probability that any of the above or similar estate tax proposals become law prior to the 2020 presidential elections? Extremely low.

Second, what is the probability that “portability” will be permitted to continue? As close to 100% certainty as you can get. Portability is simply here to stay. No one has any incentive to repeal it, and many would be very angry if it was repealed. Portability allows estate planning to be simpler for most married couples, regardless of the exemption amount or the estate tax rate.

Third, it should be noted that Senator Warren’s proposed annual tax on wealth may be considered as an unconstitutional direct tax. While the US Constitution permits indirect taxes, it does not generally permit direct taxes. We do have an annual income tax, but this direct tax was enabled by the 16th Amendment to the US Constitution.

All other predictions set out below are heavily dependent on which political party is in control of the federal government or if gridlock continues. It should be noted that we will have 2 presidential elections and even more congressional elections before the end of 2025. As a result, the applicable probabilities will change over time as the control of government changes over time.

If Republicans are in control. If the Republicans get a majority back in both houses of congress and we have a Republican President:

1. High probability that today’s 2017 Tax Act rules will be continued, and possibly permanently. [Highest Probable Outcome]
2. Mid to low probability that the estate tax is permanently repealed.
3. Mid to low probability that the 2017 Tax Act rules will be permitted to lapse, so we end up back with the 2012 Tax Act rules.
4. Extremely low probability of lower exemptions / increase in tax rate.

If Gridlock continues. If the status quo is retained where one party controls one house of congress and the other party controls the other house regardless of the President’s party, or both houses of congress are controlled by the same party but it is different than the party of the president:

1. Mid probability that the 2017 Tax Act rules will be continued for some period of time, but low probability that these rules will be continued permanently.
2. Mid to high probability that the 2012 Tax Act rules come back, as the law currently provides. [Highest Probable Outcome]
3. Extremely low probability that either the estate tax is permanently repealed or that the exemptions are lowered / tax rate increased.

If Democrats are in control. If the Democrats get control of both houses of congress and we have a Democrat as president:

1. Mid to high probability that the 2012 Tax Act rules come back on January 1, 2026 as the law currently provides, but with the possibility that these rules come back even sooner than January 1, 2026. [Highest Probable Outcome]
2. Mid to low probability that the 2017 Tax Act rules will be continued permanently. Permanent continuation will likely only occur if a grand bargain is made where the Republicans give up something significant to the Democrats in return. The Democrats may agree to a non-permanent continuation in return for something not as significant. However, what is fairly clear is that no bargain likely means no continuation.
3. Low probability that the exemption amount is lowered and rate increased similar to the rules in existence in 2009 or otherwise.
4. Extremely low probability that the estate tax is permanently repealed.

Bottom line findings. In light of the above probability predictions, what should be done?

1. For most, income tax planning became a much bigger issue after the 2012 Tax Act, and it continues to be an important concern and planning issue going forward.

2. For most, estate taxation should continue to be a non-issue with exemptions higher than most people’s level of wealth. You should review your estate plan to ensure it is up-to-date and makes sense in light of estate taxes no longer being an issue. Beneficial estate planning can and should be done, but without the need to consider the risk of a future estate tax liability.

3. For those in the mid-wealth range (single people with projected wealth that may range from $6 to $12 million or married couples with projected wealth that may range from $12 to $24 million), they should meet with their estate planning attorney or otherwise keep an eye on the laws as they may change over time. Extremely beneficial estate planning can and should be done, but the risk of a future estate tax liability needs to be considered.

4. For those with high wealth or ultra-high net worth (single people with projected wealth well above $12 million or married couples with projected wealth well above $24 million), planning will need to be a constant companion. You should visit your estate planning attorney to ensure you take advantage of extremely beneficial estate planning benefits, while planning to minimize any potential future estate tax liability. This group should keep an eye on possible, but unlikely, permanent estate tax repeal.

5. For those living outside Georgia or have significant real property outside Georgia. Those who may be subject to state laws other than Georgia need to be aware of any applicable state level estate or inheritance taxes. These type taxes are determined independently of the federal tax rules and / or use different exemption and tax rate amounts. For those with these issues, their estate plans may end up being more complex in order to deal with these issues.