Prior to the passage of the American Taxpayer Relief Act of 2012 ("ATRA"), transfer tax laws were in a constant state of flux, causing some uncertainty with respect to long-term estate planning. In an attempt to "permanently fix" the transfer tax laws, Congress passed ATRA to provide estate planning professionals with certainty regarding the transfer tax law system. Among other things, ATRA:
- Established the estate and gift tax exemption amount at $5 million, indexed yearly for inflation.
- Set the rate for estate and gift tax taxes at 40%.
- Made permanent the use of portability, which allows a decedent’s estate to elect to transfer a decedent’s unused estate tax exemption amount to his or her surviving spouse. (While portability may work in some situations, it may be disastrous in others.)
In March 2014, the U.S. Treasury Department released the General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals (aka the “Greenbook”). Notwithstanding the passage of ATRA, the Greenbook includes proposals to change some of the transfer tax laws that ATRA “permanently fixed.” For example, beginning in 2018, the Treasury Department proposes to “make permanent the estate, GST, and gift tax parameters as they applied during 2009.” This translates to an estate and generation-skipping transfer (GST) tax exemption amount of $3.5 million and $1 million for gift taxes, with no indexing for inflation. The new top tax rate applicable to the proposed lowered exemption amounts would be increased to 45%.
In addition to the proposal to lower estate and GST exemption amounts, the Greenbook also contains a proposal to completely change the rules related to the annual exclusion, which is the amount a donor may annually gift to any number of donees. Currently, the annual exclusion is $14,000 per donor for gifts to an unlimited number of donees. The Greenbook proposal would limit the annual exclusion to a maximum of $50,000 per year regardless of the number of donees.
These changes could have a profoundly negative impact on some estate plans.
The Greenbook contains other proposals that, if passed into law, could dramatically impact many estate plans as well. The likelihood that all of the Greenbook’s proposals will be passed by Congress is not high; nevertheless, the passage of any one proposal may result in an undesirable change to an estate plan. It is critical to have a dynamic and fluid estate plan that can be adjusted to the inevitable changes in tax laws after so-called “permanent fixes.”
Attorneys in Taft's Private Client group will continue to monitor developments in the transfer tax system and are available to discuss the planning opportunities and challenges the transfer tax system presents. We encourage you to contact us with any questions.