By the end of 2010, most estate planning professionals guessed that a deal was not going to happen and that the 55% rate and $1 million exemption would come back in 2011, but like the U. S. Cavalry in a John Wayne movie coming to the aid of the settlers, Congress acted just in time, December 17, 2010, to increase the estate exemption to a full $5 million per person with a top estate tax rate of “just” 35%. This law is set to expire on December 31, 2012, and if not extended, will put us back to the 55% rate and $1 million exemption, so we could go through this exercise again in less than two years. The fact that we could end up with a reduced exemption in 2013 has prompted some advisors to suggest caution about using the $5 million exemption for gifts and general planning considerations.
The writer of this blog has been involved with the estate tax for 30 years now and during that time, despite all the rhetoric and hand-wringing, the estate tax exemption has never been reduced, other than through the 2011 repeal of the repeal of the estate tax. Before November 1981’s Economic Recovery Tax Act (“ERTA,” we affectionately called it; funny how those acronyms usually work out) the maximum exemption was only $60,000 as I recall, and with ERTA, it immediately jumped to $200,000 and then grew each year to be $600,000 per person. Then in the late 90’s the exemption was increased from $600,000 to $675,000 and then to a full $1 million at the turn of the millennium. (I have been waiting for the right time to use that phrase, “Turn of the millennium.”) Then with the Bush Tax Cuts, the exemption grew steadily from $1 million, to $1.5 million, to $2 million and finally to $3.5 million in 2009, which brought us to full repeal for those heirs lucky enough to inherit from decedents dying in 2010. So ignoring the repeal year of 2010, the exemption amount has now grown from $3.5 million to $5 million per person. What’s more, “portability” now exists between spouses, meaning that a surviving spouse basically “inherits” the right to use the unused exemption of their last deceased spouse.
With a history of 30 years and no reduction in the estate tax exemption over that time, what are the chances Congress will cut back the existing exemption from $5 million to something less? This blogger sees that as doubtful. Some might argue that Congress will try to raise revenue on the backs of the “rich” and will reduce the $5 million exemption. While this is possible, such a move would be more cosmetic than anything else because, even when the rates were higher and the exemptions lower, the estate tax has normally provided only about 2% of federal revenues. Therefore, barring a demagogic move at raising the estate tax, it is likely the exemption will remain at $5 million, at least. It is, therefore, this blogger’s opinion that clients should make their plans based upon the expectation that the $5 million exemption is here to stay.