In 1976, the lifetime exemption from Federal estate taxes was $60,000. By 1987 the exemption was $600,000. By the time President George W. Bush had taken office, it was scheduled to increase to $1 million by 2006, but in the summer of 2001, Congress enacted scheduled increases in the exemption to $3,500,000 by 2009. That legislation also called for a one-year repeal of the estate tax in 2010, after which there was a sunset provision taking us back to the $1 million exemption. We spent the entire decade trying to figure out where federal estate taxes were headed.
At the very end of 2010, Congress kicked the can down the road two more years, with a surprising increase in the exemption to $5 million. More significantly, for the first time in the history of the estate tax, Congress tied the amount of the exemption to inflation. Congress also added portability. Portability means that in the case of a married couple, if one spouse dies and does not use all of his or her exemption, then the surviving spouse may use it at his or her subsequent death, provided that he or she has not remarried.
The problem was that the 2010 legislation expired at the end of 2012, once again potentially taking us back to the $1 million exemption and all the other “old rules.” As you can see, from 2001 through the end of 2012, uncertainty reigned.
In the opening days of 2013, a new law was enacted which essentially made permanent the changes that had been made at the end of 2010, such that
- each person has an exemption which, taking into account inflation since 2010, is $5,340,000 for 2014,
- portability for married couples is made permanent, and
- everything over the exemption amount is taxed at 40%.
In 1976, Wisconsin had an inheritance tax which often applied to persons with estates smaller than the amount at which the federal estate tax would apply. Later, Wisconsin followed the lead of almost every other state in switching to a Wisconsin estate tax which only applied to the extent there was a federal estate tax, and then only to the extent that there was a credit, dollar for dollar, on the federal return for the amount of the Wisconsin estate tax. This meant that once the Wisconsin ESTATE text was enacted, there was never any net out-of-pocket cost to the Wisconsin tax. When the major changes were in acted in the federal tax in 2001, the credit for Wisconsin tax was phased out, effectively eliminating any estate tax in the State of Wisconsin. Although Wisconsin extended the Wisconsin estate tax for a few years with a temporary patch, that provision has now expired, and because of the structure of the federal estate tax law, as a practical matter there is no Wisconsin tax, and there is nothing on the horizon to indicate that this will change anytime soon.
As a result of these important changes which are finally made permanent, we can once again work on estate planning from a tax perspective with a degree of certainty not possible during the prior 12 years. Also, many clients will no longer need to take federal estate tax into account when doing their estate planning, often resulting in simpler documents.
One very significant impact of the higher exemptions and portability is that in the case of married couples where one spouse has a very large IRA, or it is now much easier to take full advantage of the exemptions of both spouses than before portability. Very little has been written about this key advantage under the new law.
The real net effect of these changes in the estate tax laws is that clients can focus their attention where it always should have been: on nontax aspects of planning for their loved ones.
© 2014 by Stephen J. Smith
creator, The Family Vision Experience™