Death & Taxes – Over the last twenty-five years the Federal Estate and Gift taxes have become less and less relevant, affecting fewer and fewer Americans as the rates have been reduced and the exemptions have increased from $675,000 all the way to the current $11.4 million. If the taxpayer is married double that to $22.8 million.
The “moderately” wealthy – that would be those of you having a net worth of $5 million to $20 million – by and large have felt there was no longer any need to pursue professional estate planning. After all, your family will never have to deal with taxes when you may pass.
Consider this a wake-up call. This too shall pass. Maybe in 2020. Maybe in 2024. But higher taxes will be returning. Not incrementally, but likely in the form of dramatic increases in not only the death (Estate) tax but also an even more oppressive gift tax that will punish lifetime transfers.
Franklin D. Roosevelt was elected four times as President of the United States. After his death this nation ratified the 22nd Amendment to the Constitution establishing a two term limit. Only once since FDR’s passing in 1945 has a political party held the White House for three terms. That was George H.W. Bush who, in 1988, effectively ran for a 3rd Reagan term. The Republicans (lower taxes) won the White House in 2016. Will the “blue wave” of 2018 deny Donald Trump a second term, or will the Republicans hold on till 2024. In 2024 what’s the likelihood of a third consecutive term for the same party? History tells us not likely at all.
Whether it’s next year or four years, hence, expect a Democrat to again win the White House and newly elected Presidents often sweep in control of the House and Senate on their coattails. The Democrat party has shifted increasingly Progressive and the policies espoused by outliers, such as Sen. Bernie Sanders, are now mainstream. Indeed, higher and higher taxes and additional forms of taxation are on the platforms of many of the declared Presidential candidates. Sen. Sanders has written his proposals into the form of a Bill, titled the “99.8% Act.” Let’s use this Bill as the model for what Americans can expect to eventually be enacted in the next Democrat administration.
You, the moderately wealthy in America, who are now free of estate taxation, will see the $11.4 Million exemption be reduced to $3.5 Million. Suddenly the bad old days are back. Uncle Sam will be chasing you to Heaven or to the Gates of Hell to get his “fair share.” Think you’ll just need to start transferring wealth to your spouse and children during your lifetime? The Gift Tax, which now shares the same $11.4 million exemption as the Estate Tax will be imposed on lifetime transfers that aggregate more than $1 million.
That covers how much of your wealth will be subject to taxation, but what about the rate of taxation? Currently it’s a flat 40% over $11.4 million. Under the 99.8% Act the rates will graduate.
$3.5 million to $10 million 45%
$10 million to $50 million 50%
$50 million to $1 billion 55%
Over $1 billion 77%
I know what you’re thinking – “Wait and See.” At 2 AM on the morning after the election if a Progressive gets the 270th electoral college vote you’ll call an estate planning attorney without fail. That may just be too late.
That’s because of what’s know as the Effective Date of legislation. That date may well be when a Bill was submitted and not when it’s enacted. Also, the “Step Transaction Doctrine” would make planning in a compressed time frame more perilous to the taxpayer (you!). An example would be that you hold all the family assets. You then transfer assets to your spouse. Your spouse in turn transfers the assets to a trust. As a “Step Transaction” the IRS would assert that you just made the transfer to trust yourself. Actions which take place over a longer timeframe would be less likely to invite these risks.
Have I succeeding in putting a damper on your spirits? The worst is now to come. When you first undertake engaging an attorney you expect that, as an expert in the field, your attorney will know all the “loop holes” that will enable you to dramatically minimize the tax burden on both you and your loved ones.
This next time around expect that future laws, including what’s in the 99.8% Act, will not just be about broadening the tax base and raising the tax rates, but also about elimination of the time tested lawful means by which we of the legal profession have protected you and your family in the past.
A short laundry list of what the 99.8% Act takes away: Crummey Powers (say goodbye to insurance trusts), Grantor Retained Annuity Trusts (GRATs) will increase to a minimum term of ten years effectively ending the use of one of our most popular techniques for older clients, Intentionally Defective Grantor Trusts (IDGT) assets will no longer escape inclusion in you estate, and Dynasty Trust planning which has permitted wealth to pass through generations without tax will now effectively be capped at 50 years through changes to what’s called GST taxation. Valuation discounting in family situations will no longer be available and this has been the most effective tool in our quiver to reduce values for taxes.
My message to all of you who are moderately wealthy, having enjoyed great success and accumulated $5 million to $20 million in net worth, is that you cannot afford to sit back and wait to react to future changes in Estate Tax and Gift Tax legislation. The time to act is now. Call for an appointment with Rabinovich Sokolov Law Group and start now to protect your legacy. You spent a lifetime earning it! Make sure your family gets to keep it!
© Alan Jay Ackerman, Esquire
Rabinovich Sokolov Law Group
1700 Market Street
Philadelphia PA 19103