Death taxes, and political arguments over such taxes, rival death itself as one of life’s certainties. In 21st Century America, of course, the federal estate tax is a perennial political hot potato in most national elections, and post-election, remains so.
We are amidst intense political turmoil, in general, with the debate on federal estate tax law change increasingly on the front burner. How do you plan for an unknown future?
Currently, we have a high (might we say “huge”?) federal estate tax exclusion of $11.7 million this year. By its terms, however, the exclusion amount drops to the pre-2018 levels of $5 million indexed for inflation (estimated as a bit over $6 million) in 2026. The Maryland estate tax exclusion is $5 million not indexed.
Rather than simply reducing the estate tax exclusion amount, President Biden floated a more involved change that would include substituting a carry-over basis for the current asset basis step-up at death in conjunction with a lowered exclusion amount. This plan would result in a capital gains tax on some of the gain associated with inherited assets. The plan suggests that the first $1 Million of gain would be exempt, but many of the details beyond this remain vague as there has been little comprehensive public discussion of estate tax changes from the White House. In addition to the change in basis, the President has endorsed dropping the estate tax exclusion amount back to the 2009 level of $3.5 million and generally increasing the tax rates for larger estates.
Senator Bernie Sanders has presented a more comprehensive plan. His Act—the “For the 99.5% Act”—would likewise lower the estate tax exclusion amount to $3.5 million as well as tighten various grantor trust rules. His proposals would also limit intra-family fractional interest discounts – a useful method of passing financial interests to the next generation. This change, thankfully, would not apply to farms or closely held businesses. If any federal legislation lowers the estate tax exclusion amount below $5 million, assume that Maryland will follow suit.
Whatever estate tax legislation that may be coming seems to have taken a back-seat to spending bills and therefore may not happen this year. The legislative spending may force significant income and estate tax changes. As the quote often attributed to the late Senator Ev Dirksen goes: “A billion here, a billion there, and pretty soon you are talking about real money.” Now days, it’s a trillion here and there.
One estate tax planning take-away from looming tax changes is to keep flexibility in the plan. Assume exclusion amounts may drop significantly, so build in credit shelter trusts in the planning. This peels off the maximum exclusion amount – whether $5 million or $3.5 million – to fund a trust using the first -to-die spouse’s exclusion, thus preserving it. This trust can be triggered by a disclaimer at the first death or predestined by the Will or Revocable Trust structure. Another approach is to rely on the portability election. For clients with significant wealth, a popular approach is to create spousal limited access trusts (“SLATs) which make use of the elevated exclusion amount by making significant gifts in trust now before the threshold drops.
It may be a fool’s errand to guess what Congress may decide, but estate planning lawyers need to try to anticipate possible estate tax changes and try to stay flexible, try to stay creative, but also try to stay humble. As Yogi Berra says, “It’s tough to make predictions, especially about the future.”
For over 35 years, our law firm has concentrated on the law of estates and trusts – including a wide variety of estate planning challenges brought about by constant tax law and regulatory change. The firm, Franke Beckett LLC, however, engages in estate planning within the context of a larger estates and trusts practice of law. We engage in estate planning, closely held business succession planning, estate/trust administration, and a broad range of fiduciary litigation. Because of the range of our practice within a concentrated practice area, we develop a deep experience in, and knowledge of, the Maryland law of estates and trusts. To schedule a consultation with an experienced Maryland estates and trusts lawyer for planning, administration, or litigation, call 410-263-4876 or use the “contact” tab on our website for an appointment.
