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‘Wild West’ or Business as Usual? Estate Tax Enters New Territory

Posted on March 5, 2018 by Jonathan Curry

The new tax law’s temporary boost to the estate and gift tax exemption creates a huge opportunity for estate and gift planning, but uncertainty over the future of the estate tax has left some practitioners uneasy. 

“It’s kind of the Wild West right now, because there are people who now clearly are not taxable, but if it goes back to half the exemption in 2025 — or perhaps even lower, given a regime change — all these people could be taxable again,” Helen Rogers of Holland and Hart LLP said at a February 9 American Bar Association Section of Taxation meeting in San Diego. 

Under the Tax Cuts and Jobs Act (TCJA, P.L. 115-97), Republicans temporarily doubled the exemption levels for the estate and gift tax from a $5 million base to a $10 million base, subject to inflation, so that the actual exemption amounts in 2018 will be around $11.2 million for individuals and $22.4 million for couples. The change is set to expire December 31, 2025. 

For Jeffrey K. Eisen of Mitchell Silberberg and Knupp LLP, the uncertainty lies with the wealthy clients on the exemption bubble. 

“It’s really about what do you do for those clients in the $10 million to $20 million range? Because eight years from now, if the exemption goes back down, they’ll wish they did something now; but if the exemption ever gets made permanent, they’ll ask, why did I do all of this stuff?” Eisen said. 

Many clients in or near the new exemption range are asking whether they need to do any special planning beyond the basics, or if their previous planning was a waste of time and needs to be undone, Eisen said. “It’s like, gee, what do we do now?” 

For some estate planners, though, the uncertainty about the future of the estate tax is just another part of the job. 

“If this is the Wild West, well, been there, done that,” Anne-Marie Rhodes, who teaches estate planning at Loyola University Chicago School of Law, told Tax Analysts. Traditional tax practitioners know when a deal will close, she said, but estate planners don’t have the luxury of knowing when a client will die, what assets they’ll own, or what might change in the law. “I guess it’s just part of the territory,” she said. 

Eisen similarly said that although estate planners are indeed entering a new era of uncertainty, this is just the next iteration in a long series of shifting estate and gift tax parameters. 

“If you have been practicing any length of time, a shifting exemption and shifting rates are just part of the deal. And even things that are quote-unquote 'permanent,' are not permanent,” he said. Eisen said that after 2012, following a tumultuous decade in which the estate tax was phased down before being completely eliminated for one year and resurrected the next, many estate planners thought they knew what to expect. And even post-TCJA, there are likely to be eight more years of predictability, he said. 

“But,” continued Eisen, “then we’re back in the ‘if this, then that’ world.” If the estate tax changes aren’t made permanent in 2026, then the exemptions will revert back to the 2017 levels, and in the meantime clients are asking if they should use up the higher exemption now, despite worries about the potential for clawback of gifts made during the higher exemption period. 

Although the TCJA directs the IRS to issue regulations to prevent clawback, “in the tax arena, we know that what Congress did, Congress can take away, so you know, we kind of hold on to that,” Rhodes said. 

Eisen added that with the exemptions’ expiration eight years away, it’s unlikely to be a high priority for Treasury as they look to roll out a bevy of new tax guidance, so the clawback uncertainty could potentially stretch on for years. 

On a February 27 estate tax webinar hosted by the ABA tax section, Martin M. Shenkman of Shenkman Law said that while Treasury officials have indicated they’re confident clawback won’t happen, drafting regs to address the issue is more complicated than it might seem because of adjusted taxable gifts. “It’s not as easy as slipping off a greasy log,” he quipped.

Limited-Time Opportunities 

For now at least, planners are urging many of their clients to be proactive during the period of higher exemption levels. 

Rogers said that keeping estate plans as flexible as possible will be key, but added that there are also “family reasons for a non-flexible plan” that will need to be taken into consideration. 

With lifetime transfers, for example, Rogers recommended retaining the ability to unwind a transfer if it later becomes unnecessary or unwieldy. She said that if a client gifts or sells to a grantor trust and retains the ability to substitute assets, they could bring low-basis assets back into the estate before death. 

For clients now in the exemption range, basis and income tax planning, which was once an “afterthought in the estate tax planning world,” is now a top priority, Eisen said. Clients in this range want to be assured that assets that go into a bypass trust or credit shelter will get a second step-up in basis when the surviving spouse dies, he said. 

Shenkman predicted that the most likely outcome is that the exemptions will revert back to the pre-TCJA levels in 2026. “That risk is part of why we’re concerned that clients should take advantage of this,” particularly the clients who are in the nontaxable range right now but whose net worth could grow into a taxable amount by 2026, he said. 

On the ABA webinar, Jonathan Blattmachr of Pioneer Wealth Partners explained that since those clients intend for their wealth to grow, it’s “extremely important” to take advantage of the higher exemptions now. “You want to take action which will tend to use the exemption and otherwise freeze the value of their estate so they won’t have an estate tax problem,” he said. 

Shenkman added that the benefit of the exemption isn’t just for those in the new exemption range. Clients in the $40-million-or-less range could take advantage of the new exemption to unwind split-dollar loans, to pay off notes, or to unravel note sale transactions, which he said would simplify estate plans. 

Yet for all their efforts, pitching clients on new estate planning strategies could be a hard sell this time around, according to Eisen. 

The up and down exemption and rate fluctuations throughout the 2000s, along with the pace of planning strategies that quickly became outdated, gave some clients “estate planning fatigue,” Eisen said. “A lot of them, they’re just tired of hearing it.”  

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