By Jeffrey R. Wolfe, Senior Vice President, Manager of Wealth Planning Strategies
Regardless of which study you choose to follow; the estate tax has generated a tiny amount of revenue for the federal government since World War II. Just after the war the tax generated its highest percentage of revenue, almost 2.6%, but since then it has swayed between 1-2% of total government revenue, typically near the 1% mark. Most estimates today predict less than 1% of revenue generated by the estate tax, with some predicting as low as .7%.
In spite of these paltry numbers, politicians have been constantly manipulating the estate tax regime, especially over the last 20 years. The topic arises regularly on the campaign trail or often times comes up as a “revenue raiser” for congressional spending needs. While it’s unlikely that even a doubling of the 1% in revenue generated by the estate tax would be enough to cover most new programs, that’s not what we are debating here. Moreover, the purpose of this blog isn’t to say whether the tax should stay or go, or to argue if the exclusions or rates should be raised or lowered. Rather, the purpose here is to remind everyone that as politicians continue to manipulate the estate tax rules there is a strong chance their actions will affect your personal estate plan significantly.
Many estate plans reference the estate tax exclusion to decide whether a trust should be created at one’s death, and to determine how much money moves into that trust. However, depending on the age of your plan, things may be way different than you think. For example, in the 1990s the estate tax exclusion amount was $600,000. That exclusion later moved to $1 million, then grew to $3.5 million and today is $11.4 million. If your documents reference the estate tax your plan has been modified multiple times without your input. In other words, as politicians play with the estate tax, they play with your legacy goals.
Where are we today? Currently, the estate tax exclusion is $11.4 million, and it is scheduled to increase with inflation until 2026. At that time, barring any action by Congress to the contrary, the exclusion will revert to 2017 levels, which will be $5 million, plus some inflationary increases. That said, President Trump has pressed Congress to repeal the estate tax, which has so far failed to pass.
As of this blog, there are 10 Democratic candidates for president. All of them have messaged they want to change the estate tax laws to pay for certain initiatives. Some of them haven’t expressed a specific exclusion or tax rate, but others have made very specific proposals. Most wish to lower the exclusion back to the $3.5 million level and wish to raise the rate to at least 45%. Julian Castro wants to lower the exclusion to $2 million and tax everything in excess as taxable income. Elizabeth Warren also wants the lower exclusion and a 2% tax annually on wealth above $50 million. Bernie Sanders wants a 77% tax rate on any estates worth more than a $1 billion.
Whether any of these plans ever see the light of day is beyond my ability to predict. However, what I do know is that regardless of who holds political power, the estate tax will be changing again, either proactively, or by default in 2026.
So, what should you do? Well, whether you like it or not you need to pay attention to these issues and determine whether any change affects your personal planning. While life events like a death or marriage may cause you to consider updating your plan, changes in the law should spark the need for review as well. And remember, there are still 18 states that have an estate or inheritance tax at the state level, another target to keep your eye on.
Be sure to work with your tax and legal advisors, along with your Benjamin F. Edwards financial advisor, to assure your plan is up to date. Failing to keep up with the whims of Congress could greatly affect your legacy goals.
IMPORTANT DISCLOSURES
The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards & Co. is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.