Wendy Z. Cox, J.D., CTFA

Senior Vice President, Director of Personal Trust and Fiduciary Officer

Death and Taxes

As Benjamin Franklin wrote at the founding of our country, “nothing in this world can be said to be certain, except death and taxes.” With each change in the make-up of Congress, what to do with the estate tax is an issue that is inevitably raised. The two major components of the estate tax are the Applicable Exclusion (“exclusion”); that is, the amount that each person can shield from estate tax, and the marginal tax rate. As of this moment, the exclusion is $11,700,000 ($23,400,000 for married couples ) and the highest marginal tax rate is 40%. There has been speculation that the new administration will seek to lower the exclusion and increase the tax rate.

A history of the estate tax provides helpful context. See figure below. The federal estate tax has existed since 1916 with the exclusion coming into place in 1921. For the first 80 years, the exclusion ranged from $40,000 to $650,000 with an average of $180,000. The highest federal estate tax rate ranged from 25% to 77% over the same period. In 2000, Congress enacted a 10-year plan which had a graduated increase in the exclusion from $675,000 in 2001 to $3,500,000 in 2009. Correspondingly, the highest rate was gradually reduced from 55% to 45% over the same time period. The law was scheduled to sunset so that there would be no estate tax in 2010. For the next 10 years, the industry said “surely Congress will do something before 2010.” They did not. 2010 came and there was no estate tax. Congress did not act until December 17, 2010, and what they agreed on was not what anyone expected.

The Taxpayer Relief Act provided that the exclusion would be $5,000,000 and would be indexed for inflation. The federal estate tax rate was reduced to 35% for 2010 , applied retroactive, and 2011 before settling at 40% in 2013. The Taxpayer Relief Act also included spousal portability provisions for the first time. These provisions permit the surviving spouse to add any of the deceased spouse’s unused exemption to his or her remaining exemption permitting spouses to take full advantage of their combined exemptions.

In 2018, the Tax Cuts and Jobs Act doubled the exemption resulting in the highest ever exemption. However, those changes in the exemption sunset at the end of 2025. If Congress does nothing, the exemption will return to the pre-2018 level of approximately $5,500,000 in 2026. President Biden’s proposal, however, is to return to the 2009 exemption of $3,500,000 with the top rate increased to 45%.

As noted previously, whether Congress will act and what will be agreed upon is unknown, but change, like death and taxes, is inevitable. In the 105-year history of the estate tax, the exemption has only been greater than $5,500,000 for 4 of those years. For high net worth individuals and families, there is no time like the present to complete estate planning to maximize the amount of wealth that can pass to future generations free of estate tax.

To make certain that your estate plan optimizes your goals, we recommend that you consult with your estate planning counsel, your accountant, and your team at Greenleaf Trust and Greenleaf Trust Delaware.

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