Will the Estate Tax Exemption Ever Be Reduced?

By: Jim Dossey, MS, MBA, JD

The estate tax exemption, currently $5.34 Million for each individual in 2014, is in the cross-hairs again for possible reduction. Under President Obama's proposed 2015 budget (called the "Green Book"), the following changes would be made to the estate tax exemption by 2018:

  • Reduce the estate tax exemption to $3.5MM (from $5.34MM, indexed to inflation)

  • Reduce lifetime gifts to $1MM (from $5.34MM, indexed to inflation)

  • Increase the maximum estate tax rate to 45% (from 40%)

Other changes impacting estate planning include the following:

  • Altering the rules for lifetime giving to a Crummy trust

  • Increasing term of GRATS from minimum of 2 years to 10 years

  • Doing away with "Dynasty Trusts", currently available in Alaska, Delaware, South Dakota, and Wisconsin

  • Intentionally Defective Grantor Trusts

Because these changes are set to occur in 2018 after Obama's term ends, it is unclear whether they will actually take place. What we do know is that reducing the estate tax exemption and tax loopholes for "the rich" will always be on the targeted list.

In truth, the estate tax impacts very few people and collects a miniscule amount of revenue for the US government. Consider these statistics from the IRS:

  • 73,100 estate tax returns were filed in 2003; in 9400 were filed in 2012

  • In 2011, the government collected 117 times more income tax than estate tax.

  • Only 0.38% of the 2.5 million people that died in the US in 2012 filed an estate tax return.

Despite its annual inclusion on Obama's list, the risk of an estate tax exemption reduction has been significantly reduced since the exemption amount was tied to inflation in 2012. Prior to 2012, Congress had to affirmatively vote to extend the exemption; now they must affirmatively vote to stop it.

For our clients, we usually recommend Wills with tax planning strategies for estates starting in the $3-5MM range. We plan for the worst and hope for the best. We also know that if it is on Obama's target list, it must be a great opportunity for taxpayers.

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