I am always amused when Congress passes “permanent” tax legislation. It’s that kind of “permanency” that has kept tax lawyers like me perpetually employed. Take, for example, the estate tax provisions just enacted as part of the American Taxpayer Relief Act of 2012. In this new law, Congress proudly announced that the $5 million lifetime estate, gift and generation skipping transfer tax exemption is now a permanent part of the tax law. Moreover, it is indexed for inflation from 2011 forward, so that the current exemption amount per person is $5.25 million and rising. Congress also “fixed” the estate, gift and GST tax rate at 40%.
When I looked up the word “permanent” in the dictionary and the thesaurus, I concluded that these legislative changes should be “enduring,” “perpetual” or, at the very least, “long-lasting.” Yet, not more than three months after ATRA 2012 was signed into law by the President, he proposed changing these provisions in his fiscal year 2014 revenue proposals. Not only would President Obama decrease the lifetime estate and GST tax exemptions to $3.5 million per person and the lifetime gift tax exemption to $1 million, but he also would increase the highest transfer tax rate to 45% (in addition to making many other changes to the estate and income tax provisions that would raise revenues). Of course, these changes would not take effect until 2018, allowing us to enjoy five years of “permanency.” He also immediately would do away with various advanced estate planning techniques, including eliminating short-term and rolling GRATs, curtailing the use of intentionally defective grantor trust transactions involving closely-held entities, and limiting the duration of perpetual, “dynasty” trusts to 90 years.
When it comes to enacting “everlasting” laws, Congress is no better at keeping a promise than the President. On March 23, the Senate, in an amendment to the continuing budget resolution proposed by Sen. Mark Warner (D-VA), overwhelmingly voted (80-19) in favor of repealing the estate tax if sufficient revenues can be raised to replace the lost revenue. While this is not binding on anyone, it clearly signals a sea-change in the way the estate tax is viewed by Democratic Senators, a position that clearly would be supported in the Republican-controlled House.
Of course, all of the estate tax provisions and other “permanent” tax law changes are being reviewed and discussed in closed sessions and open hearings in both the House Ways and Means Committee and the Senate Finance Committee, with an eye toward legislation later this year or early next. Many of the topics under discussion are summarized nicely in the recently-released Joint Committee on Taxation Report on “Present Law and Suggestions for Reform Submitted to the Tax Reform Working Groups.” This report can be found at https://www.jct.gov/publications.html. Not surprisingly, on page 553 of the report, the House Ways and Means Tax Reform Working Group reported that several submissions called for repeal of the estate and gift tax regime, while others supported retaining it.
Given that almost any of the estate tax provisions could be changed later this year, it still makes sense for certain individuals to consider shifting wealth and appreciation out of their estates at a relatively low or no tax cost. For example, if you have rapidly appreciating assets, such as an interest in a closely held business, you could sell a minority interest in the business to a dynasty trust for the benefit of children and future generations in exchange for a long-term promissory note, reduce the amount of your estate subject to estate and GST taxation, and retain control of the business. While the President has proposed curtailing some of the features of this transaction, there is no certainty that his proposals will be enacted. Also, if the estate tax is “permanently” repealed, it still may be re-enacted at a later date. Planning now may avoid problems of “permanent” tax legislative changes in the future.
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