The Estate and Gift Tax ‘Rollercoaster’

Take-Away: A look back at the past 10 years reinforces the conclusion that there has been anything but certainty when it comes to the federal estate, gift and GST tax laws. It is challenge for advisors to give sound and practical planning advice to individuals when the transfer tax laws change as dramatically and frequently as they do. It is probably that this dynamic tax environment will continue apace.

Background: On the heels of the 2017 Tax Act we daily read about Bernie Sander’s For the 99.8% Act Bill which is before both the House and the Senate, and Elizabeth Warren’s campaign proposal for much higher federal estate tax rates and a 2% Annual Wealth Tax. We also know that the House passed its version of the SECURE Act earlier this year and we await for the Senate to pass its own version of the SECURE Act, which will end the stretch IRA, and substantially increase the income tax burden on inherited retirement accounts. It is difficult to keep track of all these tax law changes, actual and potential, that seem to change every year, not to mention cope with the IRS’s delay in publishing the Regulations to implement all of these tax law changes. This is the  environment in which we provide advice and guidance to clients.

Litany o Tax Law Changes: I read an article over the weekend that was a painful reminder of all the tax law changes that Congress has made to estate planning over just the past decade that we have had to absorb when giving guidance and recommendations. A sampling follows:

2008- Accessions Tax: The Heroes Earnings Assistance and Relief Act [HEART] created IRC 2801. This section added to the existing federal transfer tax regime an accessions tax that requires the recipient of a gift or bequest from an expatriate to know the expatriate’s tax profile and pay a tax, i.e. the donee and not the donor pays the tax. This tax was supplemented by Announcement 2009-29 that noted that reporting and payment of the accessions tax would be delayed until Regulations were published. Proposed Regulations were published in 2015 [Reg. 28.6071-1(d)] but they provided that no reporting or payment of the IRC 2801 accessions tax would be due until 18 months after Final Regulations are published. So far, no Final Regulations have been published to implement IRC 2801 despite more than 10 years from its enactment. [Perhaps the IRS is like the rest of the estate planning world- it is just trying to keep its head above the waterline with the onslaught of new taxes, the repeal of old taxes, and addressing the perceived abuses that result from a constant period of tax law changes.]

2010- Estate Tax Repeal for One Year: The federal estate tax was repealed in 2010 (going back to the Economic Growth and Tax Reconciliation Act of 2001 that phased-in in larger federal estate tax exemptions over that decade, ending in a grand finale with the federal estate tax’s repeal in 2010.)

2010- Carryover Basis Arrives: Replacing the federal estate tax in 2010 was the institution of carryover basis for the assets in a decedent’s estate. [IRC 1022.] Despite having a decade to prepare for carryover basis, little was done, which left the federal transfer tax and income tax rules in chaos in 2010.

2010- Retroactive Reinstatement of Estate Tax: The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, [the 2010 Tax Act] retroactively reinstated the federal estate tax with an ‘election out’ of estate tax regime into a carryover basis regime, but only for deaths in 2010.

2010- GST Tax Applicability: The 2010 Tax Act also converted the inapplicability of the GST tax in 2010 to a zero GST tax  rate for 2010 in order to preserve the continuous application of the GST tax rules from one year to the next.

2010- Clawback Rule: The 2010 Tax Act added IRC 2001(g), called the ‘anti-clawback’ rule. It is to be applied when calculating federal estate tax liability due to the decedent’s prior taxable gifts the value of which are added back to the decedent’s taxable estate.

2010- Portability Added: The 2010 Tax Act added the transfer of the applicable exclusion amount from a deceased spouse to their surviving spouse, making much of the credit shelter trust planning obsolete.

2010- Postponement of the 2-Year Sunset: The 2011 sunset, created by the 2010 Tax Act, is postponed for two more years until the end of 2012.

2012- Permanence of Tax Law Changes: The American Taxpayer Relief Act of 2012, enacted two days after the postponed sunset of 12/31//12, makes these law changes permanent.

2012- Cost-of-Living Adjustments Added: Beginning in 2012, cost-of-living adjustments are added to the federal applicable exclusion amounts.

2015- Basis Consistency Rules Added: The Surface Transportation and Veterans Health Care Choice Improvement Act adds IRC 1014(f) and 6035, which imposes a $0.00 income tax basis for assets not disclosed on the decedent’s federal estate tax return, and burdensome reporting obligations on fiduciaries to both the IRS and to all beneficiaries of an estate. We are still waiting for Final Regulations on these new Code sections.

2016- Definition of ‘Spouse’ Expanded: In light of the  S. v Windsor and Obergefell v. Hodges Supreme Court decisions, the definition of spouse is updated in T.D. 9785 (August, 2016). Same-sex married couples can now engage in the same type of estate planning, including the unlimited marital deduction, as more conventional married couples.

2017- Regulatory Relief: Under the President’s Executive Order 13789 (April 21, 2017) stricter standards and procedures are imposed to evaluate the relative benefit and burdens of ‘significant regulatory actions.’ This Executive Order suspended proposed aggressive interpretations of IRC 2701 to 2704 (the zero valuation rules in intrafamily transactions) that were put forth in Proposed Regulations.

2017- New Tax Act: Included in the 2017 Tax Act are: (i) another anti-clawback mandate in IRC 2001(g)(2); (ii) limitations on income tax deductions for estates and trusts; (iii) limitations on the deductibility of estate administration expenses under IRC 67(e); (iii) a pass-through of unused deductions to beneficiaries of in the final year of an estate or trust under IRC 642(h); (iv) the new qualified business income deduction under IRC 199A (which no one understands); (v) new threats for multiple trusts under IRC 643(f) where a deemed tax avoidance purpose will be applied; (vi) an increase in gift, estate, and GST applicable exemption amounts, but also sun-setting those larger exemption amounts in 2026, then going back to 2017 levels (adjusted for cost-of-living; (vi) limitations on the deductibility of state and local taxes (SALT) as an income tax deduction ($10,000 per year max); (vii) reducing income tax rates for individuals while expanding the income tax brackets; and (viii) doubling the standard deduction, while eliminating the personal exemptions for income tax reporting.

Conclusion: Just reading this short summary of what transpired in the past decade dealing with tax law changes leaves me exhausted. We possibly now have the SECURE Act, and possibly some form of the For the 99.8% Act to look forward to in the next couple of years, not to mention the scheduled sunset of portions of the 2017 Tax Act. The challenge will be to try to stay current, while encouraging clients to have their estate plans reviewed every couple of years, just to stay on top of the constant changes we can expect to come from Congress.