The historical record
We created the following graphic about the historical development of the estate tax using the raw data compiled by Mark Luscombe and extended them to the present time (2024) [DirectLink][PermaLink]. There are some interesting observations.
Legend: The blue line is the tax rate in percent. The red line is the threshold in Millions $. Above the line a D indicates a Democrat as president, an R a Republican. In 2024 the red line ends at the current exemption amount of $13.61 Million. If the 2017 law is left to expire, ie., Congress does nothing, this amount will go down to approximately half of its current value. Copyright 2024 www.wealthcarelayer.com.
Analysis of the historical trends in the estate tax since 1916
- Historical Trends in Estate Tax Policy: Historically, the estate tax has been a tool for revenue generation, especially during times of economic need or to address wealth inequality. The fluctuations in tax rates and exemptions over the years have mirrored broader economic conditions, political philosophies of governing parties, and fiscal needs of the government.
- Political Dynamics and Tax Policy: The correlation between political party governance and changes in estate tax rates and thresholds generally holds, with Democratic administrations often perceived as more favorable towards maintaining or increasing tax rates on higher estates as part of their broader tax equity policies, while Republican administrations have historically sought to reduce these taxes as part of their tax-cut agendas. However, the actual changes in tax policy also depend on the broader legislative context and economic conditions.
- Stabilization and Economic Adjustments: The recent period of stabilization in tax rates and gradual increases in exemption thresholds reflects a complex balancing act between ensuring tax fairness, adjusting for economic growth and inflation, and the recognition of the estate tax’s role in the overall tax system. This period of relative stability, however, does not preclude future adjustments as economic and fiscal realities evolve.
- Fiscal Pressures from Social Security and Medicare: The United States faces significant long-term fiscal challenges, particularly with the sustainability of Medicare and Social Security, programs critical to the well-being of older Americans. As these programs face potential funding shortfalls due to demographic shifts (an aging population and longer life expectancies), there will be increasing pressure on federal budgets.
- Potential Impact on Estate Tax Policy: In light of the fiscal challenges posed by the need to fund Medicare and Social Security, it’s plausible that estate tax policy could be seen as one lever among many for addressing revenue needs. Adjustments to estate tax rates or thresholds could be considered as part of broader fiscal reforms aimed at ensuring the long-term solvency of these essential programs. This could mean potential increases in estate tax rates or lowering of exemption thresholds in the future as part of a comprehensive approach to fiscal stability, though such changes would likely be contentious and depend on the political and economic climate.
- Broader Fiscal Reforms Likely Required: Given the scale of the fiscal challenges associated with Medicare and Social Security, adjustments to estate tax policy alone are unlikely to suffice. A broader set of fiscal reforms, including adjustments to these programs themselves, broader tax reforms, and efforts to stimulate economic growth, will likely be necessary to address long-term sustainability issues.
Current positions of the candidates or their advisors
According to the Republican Presidential Transition Project 2025 monograph, supported by 100 coalition partners, “the estate and gift tax should be reduced to no higher than 20 percent, and the 2017 tax bill’s temporary increase in the exemption amount from $5.5 million to $12.9 million (adjusted for inflation) should be made permanent.” Page 697 of 887 [DirectLink] [PermaLink]
While the democratic agenda leans towards lower exemption amounts and higher tax rates, not much has been done or is planned for 2024. [Direct Link] [PermaLink]. For a potential second term, however, drastic changes are proposed. For starters, the exclusion amount for property transferred by gift or at death would be $ 5 million, indexed for inflation after 2024. See this follow-up post with details: President Biden’s Tax Reform Proposal And Estate Planning (I Of II)
What is the prudent person of high net worth to do?
At a minimum, they should talk to their estate planner now rather than waiting. “Taxpayers who put off making gifts that they’re otherwise interested in making run the risk of not being able to find an attorney with the bandwidth to properly and thoughtfully draft new trust documents as the sunset nears” [Direct Link] [PermaLink], we echo this concern.
Some strategies may include:
- Lifetime Gifts: Utilize the current high exemption amount by making lifetime gifts to heirs now. This can reduce the size of the estate that will be subject to taxation after the exemption amount decreases. Normally, the more you gift during life, the less you can transfer at death without paying estate taxes. However, the IRS has clarified that people planning to make large gifts between 2018 and 2025 can do so without being concerned that they will lose the tax benefit of the higher exclusion level once it decreases. This is accomplished by allowing the estate to compute its estate tax credit using the greater of the basic exclusion amount applicable to gifts made during life, or the BEA applicable on the date of death [DirecLink][PermaLink].
- Irrevocable Life Insurance Trust (ILIT): Purchase a life insurance policy within an ILIT to provide liquidity for heirs to pay any estate taxes without having to sell off assets from the estate.
- Spousal Lifetime Access Trusts (SLATs): Create a SLAT to benefit the spouse and descendants, which can use the current exemption amount and provide access to trust assets for the spouse during their lifetime.
- Annual Exclusion Gifts: Make full use of the annual gift tax exclusion, currently $ 18,000 per donee, which allows a certain amount to be gifted to an individual each year without eating into the lifetime exemption amount.
- Charitable Giving: Consider making charitable gifts or setting up charitable trusts, which can provide an estate tax deduction and reduce the taxable estate.
- Family Limited Partnerships (FLPs): Transfer assets into an FLP to potentially reduce the value of the estate through valuation discounts for lack of control and marketability.
- Grantor Retained Annuity Trusts (GRATs): Use GRATs to transfer asset growth out of the estate in a tax-efficient manner.
- Qualified Personal Residence Trusts (QPRTs): Transfer a personal residence into a QPRT to remove its value from the estate.
Wealth Care Lawyer, in san Luis Obispo, CA, Cayucos, CA, serving California’s Central Coast, offers dedicated estate planning services to navigate the complexities of changing tax laws. With personalized strategies from lifetime gifts to trusts, they ensure your assets and legacy are protected. For those facing the upcoming shifts in estate tax policy, Wealth Care Lawyer provides the guidance needed to make informed decisions and secure financial futures.
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