2016 Estate Planning Year in Review
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2016 Estate Planning Year in Review January 2017 The Answer is Blowin’ in the Wind 2016 brought a stunning, and to most, an entirely unexpected, nomination. Donald Trump? No. Bob Dylan was nominated for and received the 2016 Nobel Prize for literature “for having created new poetic expressions within the great American song tradition.” Who better to launch our 2016 Estate Planning Year in Review? Contact Us Come senators, congressmen David J. Backer Please heed the call 207.253.0529 Don’t stand in the doorway [email protected] Don’t block up the hall John S. Kaminski For he that gets hurt 207.253.0561 Will be he who has stalled [email protected] There’s a battle outside And it is ragin’ Jessica M. Scherb It’ll soon shake your windows 207.253.0574 And rattle your walls [email protected] For the times they are a-changin’. David S. Sherman, Jr. - Bob Dylan, The Times They Are A-Changin’ (1964) 207.253.0519 [email protected] Christopher G. Stevenson th 207.253.0515 Happy 100 Birthday [email protected] Willard Scott retired a year too early to announce this one. During Rodney A. Lake 2016, the federal estate tax celebrated its centennial birthday. 207.253.0560 Although temporary estate taxes were enacted to support the Civil [email protected] and the Spanish-American Wars, the predecessor of today’s estate tax was born on September 8, 1916. When created, the estate tax Maine rate began at 1% on assets over $50,000 and topped out at 10% on 84 Marginal Way, Suite 600 assets over $5 million. In 2016 inflation-adjusted dollars, the 1% tax Portland, ME 04101-2480 rate would have applied to estates in excess of $1.15 million, and New Hampshire the top rate of 10% would have applied to estates in excess of $110 100 International Drive, Suite 340 million. Portsmouth, NH 03801-6891 As of January 1, 2017 the federal estate tax rate is a flat 40% on 1001 Elm Street, Suite 303 assets in excess of $5.49 million. Manchester, NH 03101-1845 2016 Estate Planning Year in Review 1 scheduled to “sunset” and return to the pre-Bush The Past as Prologue tax cuts exemption amount of $1 million. As the exemption amount increased from “There must be some way out of here” said the joker $675,000 to $1 million, then to $2 million, and to the thief then to $3.5 million, it seemed improbable that “There’s too much confusion”, I can’t get no relief Congress would let the estate tax be repealed Businessmen, they drink my wine, plowmen dig my even for one year. But, as the clock ticked down on earth the final weeks of 2009, the improbable happened None of them along the line know what any of it is and on January 1, 2010 the estate tax was worth. repealed because Congress did nothing to stop it. - Bob Dylan, All Along the Watchtower (1967) A number of multi-centimillionaire and billionaire families received a financial windfall from the death of a family matriarch or patriarch during the one- The estate tax has evolved over its 100 years in a year repeal. Benjamin Franklin’s frequently quoted serpentine process. The federal gift tax was added aphorism, “nothing is certain but death and taxes,” in 1924, repealed two years later, re-enacted in turned out to be only half right. 1932, and has been in existence ever since. The gift tax is an essential backstop to the estate tax. Haven’t we all sat on a beautiful evening, Without the gift tax, people could avoid paying the mesmerized by the intoxicating beauty of a estate tax simply by giving away assets during sunset, and wished we could freeze that moment their lifetime. in time? In the closing days of 2010, Congress performed that feat of magic and stopped the Although the estate and gift tax are necessary sunset, preventing a return to the pre-Bush tax partners, they operated on separate tracks for cuts exemption amount of $1 million. Not only did decades. The current “unified” gift and estate Congress stop the sunset, it threw in a holiday tax system was put in place in 1976, imposing bonus by increasing the exemption amount from the same tax rate for both gift and estate taxes. 2009’s $3.5 million to $5 million, with inflationary 1976 also brought the creation of an annual gift increases . but only for two years . scheduling tax exclusion amount – permitting each person to another dazzling sunset for December 31, 2012, make gifts of $3,000 a year to as many people as at which time the exemption would again be desired without any gift or estate tax consequence. scheduled to revert to $1 million. In 1998, Congress raised the annual gift tax exclusion amount to $10,000, with future increases The clock ticked past midnight on December 31, adjusted for inflation in $1,000 increments. The 2012 and with Congress mired in gridlock we annual gift tax exclusion amount is currently plunged over the edge of what was described as $14,000. the “fiscal cliff.” But before we hit the rocks at the bottom of the cliff, in the first few hours of The unlimited marital deduction was added in January 1, 2013, like Superman saving Lois Lane 1981, permitting transfers of unlimited assets from a plummeting death, Congress displayed during lifetime or at death between spouses, with its super powers yet again and repeated its 2010 no gift or estate tax consequence. sunset-stopping miracle and made the $5 million exemption, with inflationary increases, permanent. In 2001, the Bush tax cuts went into effect, Inflationary adjustments since 2012 have brought raising the federal estate tax exemption amount us to our current estate tax exemption amount of incrementally over nine years from $675,000 to $5.49 million. $3.5 million, followed by repeal of the estate tax in 2010. At the end of 2010, the Bush tax cuts were 800.727.1941 | dwmlaw.com 2016 Estate Planning Year in Review 2 As if Congress didn’t dazzle us enough by its The tax plans promoted by the 2016 presidential display of magic and super powers in 2010 and candidates stood in stark contrast to each other. 2012, beginning in 2011 the federal estate tax The Clinton tax plan called for rolling back the exemption became “portable” . transferable to a federal estate tax exemption amount to the 2009 surviving spouse. With portability, and each spouse level of $3.5 million and eliminating inflationary having a $5.49 million exemption, a married couple increases. The Trump tax plan called for repeal of may now leave up to $10.98 million in assets to the federal estate tax altogether. their chosen beneficiaries without having to create a trust for the surviving spouse at the first spouse’s Post-election, all eyes are on the Trump plan. death. When the first spouse dies leaving all Although Republicans advocated permanent repeal assets to the surviving spouse through beneficiary of the estate tax in 2010, they didn’t control the designations, joint ownership and a simple will, the White House or Congress at that time, and they surviving spouse will then own all of the couples’ haven’t controlled both the White House and assets. Thanks to portability, the surviving spouse Congress at any time since then . until now. also now inherits the deceased spouse’s unused Although Republicans control a majority in both federal exemption amount. If the first spouse to the House and Senate, the 52 Senate seats held die hasn’t used their exemption amount through by Republicans fall short of the 60 votes required transfers of assets during lifetime or at death, the to end a Democratic filibuster of a bill to repeal surviving spouse will have $10.98 million of gift the estate tax. Although 60 votes may be needed and estate tax exemption and may leave assets for an outright repeal, 60 votes aren’t needed if up to that value, by lifetime gifts or at death, to the estate tax repeal is included as part of a “budget couple’s beneficiaries free of federal gift and estate reconciliation,” which only requires a 51-vote tax. simple majority. But there’s a catch. A budget reconciliation bill that has an adverse effect on the federal deficit must include a 10-year sunset provision . precisely what enabled the 2001 “Ding-Dong the Wicked Witch is Dead” Bush tax cuts to phase in increases in the estate or tax exemption amount culminating with repeal in 2010. Congress stepped in at the last minute “Reports of my Death are Greatly to ensure that the sun never set on the Bush tax Exaggerated” cuts, but the sunset provisions were a necessary part of the 2001 tax law. While preachers preach of evil fates Trump’s plan for repeal of the estate tax isn’t Teachers teach that knowledge waits entirely straightforward. The plan seems to call Can lead to hundred-dollar plates for replacing the estate tax, at least in part, with a Goodness hides behind its gates capital gains tax at death, based on “carry-over” But even the president of the United States basis. Sometimes must have to stand naked - Bob Dylan, It’s Alright, Ma Federal tax law has long provided for an increase (I’m Only Bleeding) (1965) in the income tax cost basis of assets owned by a person at death – known as a “step-up” in cost basis.