Plan On Having The Death Tax Live On

Senators Kevin Cramer and John Thune, Republicans who represent Dakota, North and South respectively, have introduced the Death Tax Repeal Act of 2023.  This is not a new thing.  I think the origination of the term “death tax” is a little murky but much credit for its adaptation as a GOP talking point goes to communication consultant Frank Luntz. Representative Wes Watkins of Oklahoma celebrated his conversion to Republican by sponsoring a Death Tax Repeal Act in 1997 and there are numerous subsequent submittals.  The Death Tax Repeal Act would repeal the estate and generation skipping tax, but leave the gift tax in place.

Since the Tax Cuts and Jobs Act of 2017 (TCJA), the death tax or. as those liberals and the Internal Revenue Code refer to it, estate tax has been less of a concern as the exemption created by the unified credit was doubled. As indexed for inflation the exemption will shelter $12.92 million in 2023.  When you throw in the unlimited marital deduction with some fairly easy planning a couple can pass $25.84 million to the next generation without estate tax.  Or if they are of a dynastic bent they can put the $25,84 million into a generation skipping tax exempt trust and insulate it and its growth from transfer taxes and state income tax for a thousand years.  If you get fancy with family limited partnerships and other techniques the $25.84 million exemption can shelter even more in assets thanks to valuation discounts.

The Looming Estate Tax Problem

I spoke with Elizabeth Bawden, a partner of Withersworldwide. about a big estate tax issue that is looming on the horizon.   Bawden is a Los Angeles based partner in the Withers private client and tax team.  The issue is not the Death Tax Repeal Act  which would probably require a Republican sweep in 2024 and even then might not fly.  The issue is the expiration of the doubling of the unified credit at the end of 2015.  At the very dawn of my tax blogging career I wrote about the rules for determining date of death, That was in 2009, when you wanted to wait until 2010 to die, because 2010 was a year without an estate tax.  The temptation in 2025 will be plug pulling.  It could make for a really neat “ripped from the headlines” Law And Order episode.

So the planning is to use the exemption before it is chopped in half.  Remember it is not just the estate tax it is also the gift tax and the generation skipping tax.  The idea is to make a mega gift before 2026.  The sooner the better really, because a gift removes not only the assets from the ultimate estate, but also the future growth.

Giver’s Remorse

As we discussed the notion Bawden pointed out that one of the biggest reasons to hesitate about a mega gift is the potential for giver’s remorse. What if it turns out that you need the resources you gave away to support your own lifestyle? A technique to deal with that issue is the Spousal Lifetime Access Trust (SLAT).  You fund an irrevocable trust for you descendants, but the trustee has discretion to make distributions to your spouse if they are required.

The assets are now out of both of your estates, but if there is a real need they are still available to you, well to your spouse anyway.  Bawden pointed me to a Fidelity site that gets into significant detail on how SLATs work.  One trick is to have each spouse set up a SLAT.  They can’t be perfect mirrors of one another and should not be set up simultaneously  and they should not be funded from joint assets. It is also worth noting by making this move you are giving up any step up in value at date of death.

Senator Thune in promoting the Death Tax Repeal Act focuses a lot on family-owned farms and ranches.  He does not get into how many farmers and ranchers have net worth north of $26 million or even $13 million.

Another argument about why the estate tax is so inequitable is that it is a double tax as you spend a lifetime putting aside net of tax earnings which are taxed again when they go to the next generation.  As it happens much of what gets passed on might be untaxed appreciation, which thanks to the basis of the heirs being date of death value will never be taxed. That trade-off between potential estate taxes and a step up in basis is something that will need to be weighed in planning for 2025.

Other Estate Planning Issues

Bawden pointed out that people hesitating to make the big step of gifting a large percentage of their assets should not be neglecting the things that can add up over time like annual exclusion gifts, accelerated funding of 529 plans and directly paying the medical and educational bills of the nature objects of their bounty.

We were able to get into the topic that is near and dear to my heart when it comes to this sort of stuff, the inspiration for Reilly’s Fourth Law of Tax Planning – Execution isn’t everything, but it’s a lot. Firms like Withersworldwide devise plans, draft documents and see that the documents are properly executed and store them.  Then they will review and revise the plan based on changes in the laws or changes in the circumstances of the family they are planning.  The actual execution of the plan falls to trustees, family offices, the family members themselves and my people – accountants.

I asked Bawden how often she reviews the tax returns of various sorts that ended up being required to make the elements of the plan work.  She didn’t give me a precise answer, but it was clearly less than always.  What they do do is provide a sort of user’s manual laying out how things are supposed to work and what the ongoing compliance requirements are.  The hope is that the clients give that to the people charged with doing the returns and that they are able to understand it.  That handoff is sometimes less than perfect.  The other thing that makes plans go astray, I can tell you from reading many Tax Court opinions is people not respecting the entities that they establish.

The other thing that Bawden mentioned is that the various trusts that you might establish to shelter wealth from taxes are a very small piece of having healthy, functioning descendants. Some families get this and others not so much.

Other Coverage

Martin Shenkman give a much more extensive tour of various trust possibilities in Back End Slats – A SLAT, ILIT, DAPT, Or SPAT By Another Name? on Forbes.com.

Christine Fletcher, also of Forbes.com, did a briefer treatment some time ago, but it still remains relevant – Should A SLAT Be Part Of Your Estate Planning?.

As I was working on this piece Bernie Sanders has struck back with the For the 99.5% Act.  You can read about it in Bernie Sanders Floats New Estate Tax Bill by Melanie Waddell on ALM Think Advisor. Most notably the act would drop the exclusion to 3.5 million, but it also squashes many techniques that are currently in use.  Michael Shenkman discusses some of the moves you might want to consider to respond to this threat in Sanders Estate Tax Proposal: Estate Planning Steps To Take Now.

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Originally published on Forbes.com.

For great value continuing professional education.  I recommend the Boston Tax Institute

You can register on-line or reach them by phone (561) 268-2269 or email vc@bostontaxinstitute.com.  Mention Your Tax Matters Partner if you contact them.

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For articles oriented toward tax professionals check out Think Outside The Tax Box.