There's a saying about death and taxes, the certainty thereof, which has been oft repeated to the point of weariness. While it is true that the imposition of taxes is a certainty, the shape and form of such taxes, especially in an estate planning context, is anything but. Just when one believes the ground to be firm in any particular tax context, the sands begin shifting. The federal estate tax has been just such an example the past several years, and estate plans should account for future uncertainty.
The estate tax is a popular political football, and both sides of the table have spent a considerable amount of time and effort kicking it back and forth in the last fifteen years. The current state of estate, gift and generation-skipping transfer ("GST") tax is that they are all subject to a unified exemption rate of $5.43 million, and then any amount above that number is subject to a tax rate of 40%. The exemption is indexed for inflation, so it will increase every year. At least, it will increase every year according to current law. The Fiscal Year 2016 budget submitted to Congress contains a proposal by the administration to return the estate, gift and GST taxes to the same conditions they were in during 2009, before the current unified exemption and rates took effect. So, estate and GST taxes would have an exclusion amount of $3.5 million, and gift taxes would be inapplicable on gift amounts under $1 million for a lifetime. The top tax rate on amounts over these figures would return to 45%, and the exemptions would not be indexed for inflation.
Now, this isn't the first budget to include this proposal, and it likely won't be the last. The chances of it finding a receptive home at any time in the near future without a substantial change in Congressional composition is very, very small, especially considering the unusual effort put forth by both parties to secure the current exemption. Additionally, the administration has sought other changes in estate taxes and estate planning, suggesting the elimination or limitation to such estate planning vehicles as GRATs, Crummey trusts, and others, and those proposals have so far failed to see the light of day in a legislative sense. However, the signal that these proposals do send is that there is always the potential for change.
Those wishing to take advantage of GRATs or Crummey trusts and other endangered planning vehicles should do so now, since there's at least a stated desire to significantly diminish the estate and gift savings associated with such planning in the future. Estate planning should also consider that, while the law currently allows a more generous exemption amount and lower tax rates, proposals are continually surfacing to restore older rates as a method of raising revenue. Those with estate plans should reevaluate them with the potential for change in mind - estate plans should evolve and adapt to changes in the law, even potential changes. One should ask whether one's estate plan is prepared for such changes, and the advice of an estate planning attorney can provide a bulwark against negative consequences for the estate.