LegiStorm

Summary:

The American Taxpayer Relief Act (ATRA; P.L. 112-240) established permanent rules for the estate and gift tax for 2013 going forward. The tax revision of 2017 (P.L. 115-97) doubled the exemption levels. This increase expires after 2025. The estate tax is imposed on bequests at death as well as inter-vivos (during life) gifts. A certain amount of each estate, $5 million in 2011, indexed for inflation, is exempted from taxation by the federal government. With indexation, the value was $5.49 million in 2017 and with the temporary doubling of the exemption and inflation adjustments, is $11.2 million in 2018. The taxable estate is taxed at 40%. The exemption applies to total bequests and gifts (separate from the annual intervivos gift exemption of $15,000 per donee for 2018). Transfers between spouses are exempted, and any unused exemption can be inherited by a surviving spouse. Other elements of the tax remain, including deductions for charitable bequests and a number of special provisions for farms and small businesses. The permanent tax treatment of estates and gifts had been uncertain for some time. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16), among other tax cuts, provided for a gradual reduction and elimination of the estate tax. Under EGTRRA, the estate tax exemption rose from $675,000 in 2001 to $3.5 million in 2009, and the rate fell from 55% to 45%. In 2010, the estate tax was eliminated. There was general agreement that some sort of estate tax would be retained. A proposal to make the 2009 rules ($3.5 million exemption and 45% rate) permanent was included in President Obama’s 2010 and 2011 budget outlines and was passed by the House in December 2009. In addition, in 2009, Senate Democratic leaders supported the plan to enact the 2009 rules permanently. The Senate Republican leadership proposed a $5 million exemption and 35% rate. This latter provision was eventually adopted for a two-year period, through 2012. For estates of decedents in 2010, either the 2010 or 2011 rules could have been elected. Spouses can inherit unused exemptions. The permanent provisions retain most of the rules adopted for 2011 and 2012, but with a higher rate. Compared with the $1 million exemption and 55% rate under pre-EGTRRA law, the new permanent rules were estimated to lose an average of about $37 billion over the next 10 years, a two-thirds reduction in estate tax revenues. The increase in the exemption level costs around $10 billion per year, a further reduction of about 40% of projected revenues. Regardless of the exemption levels considered, few estates are affected by the tax. The estate tax is a highly progressive tax, with about three-fourths collected from estates in which decedents are in the top 1% of the income distribution. At a $5 million exemption, less than 0.2% of estates will be subject to the tax. Although concerns have been raised about the effects of the tax on small businesses and farmers, estimates indicate that only a small share of these decedents would be affected. Budget proposals during the Obama Administration proposed a return to the 2009 rates and exemptions. They also proposed a variety of structural reforms, including restricting Grantor Retained Annuity Trusts (GRATs), providing consistent valuation for estate tax and basis for capital gains, limiting the duration of generation-skipping trusts, and providing consistent treatment of grantor trusts along with some other minor changes. Prior provisions would have disallowed minority discounts (for estates left to a family partnership) and addressed other aspects of GRATs. During the recent 2017 tax reform deliberations, the House proposed to increase the higher exemption temporarily, and repeal the estate tax after 2024.