Estate & Gift Taxes
The Fantastic Changing World of Estate
and Gift Tax Laws
For many years, the estate and gift tax laws provided for a $600,000 tax exclusion with a top 55% rate, plus an extra 5% tax rate for estates over $10 million. At such levels the estate tax was a confiscatory tax which was devouring the wealth of many middle class families. Calls for estate tax relief became widespread and a successive series of somewhat conflicting laws dramatically liberalized the estate tax landscape.
Passage of 2001 Estate Tax Relief
A number of my tax articles track the development of the law. Click "Estate Planning After Death Tax Repeal" (published article) for an analysis of the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). This law slowly increased the estate tax exclusion amount from $1 million in 2002 to $3.5 million in 2009 (and reduced the top rate to 45%), with outright estate tax repeal in 2010.
The Dreaded "Sunset" & One-Year Estate Tax Repeal
The strange part about EGTRRA was that on January 1, 2011 such law would be magically repealed (i.e., in tax parlance it would "sunset"), causing the estate tax exclusion to be restored to its $1 million 2002 levels, with a top 55% tax rate. Additionally, for decedents dying in 2010, there would be a one-year repeal of the estate tax paired with a "carryover" basis regimen for inherited assets. See "Federal and Illinois Estate Tax Laws under the Obama Administration" (published article) for a discussion of EGTRRA and some of the expected changes to the estate tax laws dealing with the projected repeal of estate taxes in 2010 (that strange "Throw Grandma from the Train" year) and its magical reinstatement in 2011.
Almost no estate planning attorney expected estate tax repeal to become a reality in 2010. The most popular accepted belief was that the 2009 estate tax regimen -$3.5 million federal and $2 million Illinois estate tax exclusions - would be made permanent for 2010 and later years. However, estate tax repeal became a reality in 2010 because of the the political gridlock caused by the passage of Obamacare. Wealthy decedents passing in that year reaped a windfall as they were not assessed federal estate taxes.
Click "George Steinbrenner's Estate Tax Home Run" (published article) for a somewhat humorous commentary I wrote detailing how the estate of George Steinbrenner, the irascible owner of the New York Yankees who died in 2010, avoided hundreds of millions of estate taxes because of the one-year estate tax repeal.
The 2010 Tax Act delays the "Sunset"
The much anticipated "sunset" of EGTRRA (which in 2011 would have restored the $1 million estate tax exclusion and top 55% rate) never happened. In December 2010, the tax stalemate was shattered by a new law - the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which extended most of the EGTRRA provisons to expire on December 31, 2012. Click "The New Federal and Illinois Estate Tax Laws" (published article) and "The 2010 TAX Act has (GULP!) Arrived" (seminar outline) for a commentary on this stop-gap legislation.
The 2012 Tax Act - "Permanent" Estate Tax Relief
Thankfully, the American Taxpayer Relief Act of 2012 ("ATRA"), which was effective in 2013, ended the possibility that the estate tax laws would be restored to their 2002 levels. That legislation provided substantial estate tax relief by making "permanent" the various provisions of the estate and gift tax laws:
The current (2018) estate tax exclusions and rates are as follows:
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$11,180,000 (inflation adjusted) exclusion for federal estate/gift taxes and generation skipping transfer taxes
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$4,000,000 Illinois estate tax exclusion
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$15,000 annual gift tax exclusion
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40% top federal estate tax rate
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Estate Tax Portability - go to the Estate Tax Portability page of this web site to find out about this new relief provision under the federal rules
Of course, just because we're not facing any expiring tax provisions doesn't mean future legislation won't change exemptions, rates, or breaks—or even repeal the estate tax. Therefore, it’s always a good idea to build flexibility into an estate plan.
2017 Tax Cuts and Jobs Act
Read pages 34-49 of my recent seminar outline "An Overview of the Tax Cuts and Jobs Act" regarding the new tax law signed by President Trump on December 22, 2017.
Significantly, the new law doubles the Federal estate and gift tax exclusions amount from $5.59 million to $11.18 million (2018). Accordingly, federal estate taxes are not a major concern for many clients. Planning is now gravitating toward the increased importance of income tax planning; the increased utility of having flexible trust provisions and mitigating the loss of "stepped up" basis for credit shelter trusts.