One of the more unheralded results of the tax reform negotiations that saved us all from the dreaded fiscal cliff was reformation of the federal estate tax, or “death tax,” as it is sometimes derisively called.
One of the more unheralded results of the tax reform negotiations that saved us all from the dreaded fiscal cliff was reformation of the federal estate tax, or “death tax,” as it is sometimes derisively called. Before the last minute reforms were negotiated between the executive and legislative branches of our federal government, the estate tax was set to make 2013 an extraordinarily bad year to pass away for even moderately wealthy American citizens by taking an unprecedented bite out of the inheritances of their beloved survivors.
To provide a historical perspective on this issue, between 2001 and 2012, the estate tax exclusion amount, the amount of assets protected from estate tax, went up each year, and the tax rate trended downward, making each successive year over that period a financial benefit to the heirs of the richest of citizens.
For example, the exclusion amount went from $675,000 in 2001 to $1 million in 2002. What that meant was that in 2002, after the death of a second spouse – spousal inheritance being free of estate tax in most instances – there was no estate tax at all levied on the first million dollars, up from $675,000 the year before.
At the same time, the maximum estate tax rate dropped from 55 percent to 50 percent.
And, progressively in each year prior to 2013, the exclusion amount went up, and the maximum rate trended downward, to provide greater and greater protection from estate taxes to the wealthy families of America.
For example, under this scheme, by 2009, the exclusion was up to $3.5 million, and the max rate at 45 percent.
In 2011, the exclusion amount jumped to $5 million, and the max rate dropped to 35 percent.
In 2012, the exclusion was bumped up to $5.12 million.
Hence, each year over the last decade plus, the estate tax became an issue for fewer and fewer families with each passing year, those being only the wealthiest among us.
However, under the same legislation, the estate tax implications were set to come back with a vengeance for 2013, with an exclusion amount that would have dropped to $1 million, and a max rate that was set to increase to 55 percent.
A number of people were watching this very carefully, as the effect on some families in 2013 would have been devastating.
Worst hit would have been family farmers and other business-owning families. On paper, these families may have estates that appraise for several million dollars on an estate tax return. But, they typically will lack the liquidity to write a check to the IRS for the enormous tax bill when a family patriarch or matriarch dies, necessitating a breakup of the family farm or business in “fire sale” fashion to cover the estate tax bill, had the exclusion amount remained at $1 million, and the max rate at 55 percent.
And while some may have little sympathy for the children of millionaires, think of the emotional impact on a grandma and grandpa who have worked and scrimped and saved and battled their whole lives to build a family farm or other business, and their devastation at the thought that a drastic and unprecedented change in the estate tax laws causing it to be broken up and evaporate into the hands of what is viewed by many as a wasteful, spendthrift federal government when they die, instead of their children.
Page 2 of 2 - Hence, while the estate tax issue didn’t get a lot of publicity, many observers were tuned in to whether Congress would include in its tax plan a revision of the harsh estate tax laws set to kick in in 2013.
And, to the relief of many, Congress did just that.
Under the new legislation, the exclusion amount remains at $5 million, to be adjusted annually for inflation, and the maximum rate is set at 40 percent.
Perhaps more importantly, this legislation is in place until Congress may act to change it, unlike the former scheme, which was set to come crashing down on the wealthy, family farmers and business owners prior to Congress acting.
Many are breathing a sigh of relief that they will be able to pass down what they’ve built and accumulated over their lifetime, without the government taking a giant bite out of it.
Ken Garten is a Blue Springs attorney. Email him at firstname.lastname@example.org