Estate Tax Changes Past, Present, and Future Charting the rates, Planning for mates, Watching the states, Handling the waits, And predicting the fates Of the effective dates. By Ronald D. Aucutt MCGUIREWOODS LLP Tysons, Virginia; Washington, D. C. March 2019 (Outline updated through March 1, 2019) https://www.mcguirewoods.com/estate-tax-changes © Copyright 2019 by McGuireWoods LLP. All Rights Reserved. Estate Tax Changes Past, Present, and Future Ronald D. Aucutt Table of Contents I. Introduction ....................................................................................................................1 II. Past Reminiscences ........................................................................................................1 A. The World War I Era .............................................................................................. 1 B. The Kennedy-Johnson Studies and the Nixon Administration ............................... 1 C. The Ford Administration......................................................................................... 2 D. The Reagan Administration .................................................................................... 3 E. The Clinton Administration .................................................................................... 4 III. The Turbulence Created by the 2001 Tax Act ...............................................................6 A. The Phase In and Out of the 2001 Tax Act ............................................................. 6 B. The Gift Tax ............................................................................................................ 7 C. The State Death Tax Credit..................................................................................... 7 D. Carryover Basis ....................................................................................................... 8 E. Three Shall Nots and One Had Never Been ........................................................... 8 IV. Republican-Led Efforts to Repeal or Reform (2001-2006) .........................................10 A. Early Efforts After 2001 To Make Repeal Permanent .......................................... 10 B. Reports of Compromise Efforts ............................................................................ 11 C. The 2004 Election ................................................................................................. 11 D. The Final Push for Repeal or Compromise........................................................... 12 E. PETRA .................................................................................................................. 13 F. ETETRA ............................................................................................................... 14 G. Adjournment ......................................................................................................... 15 H. What Might Have Been ........................................................................................ 15 V. “Options” Presented by the Joint Committee Staff (2005) ..........................................16 A. Perpetual Dynasty Trusts ...................................................................................... 16 B. Valuation Discounts .............................................................................................. 17 C. Lapsing Crummey Powers .................................................................................... 18 D. Consistent Basis .................................................................................................... 19 E. 529 Plans ............................................................................................................... 19 VI. “Middle Class” Focus Under Democratic Leadership (2007-2008) ............................19 A. The Fiscal Year 2008 Congressional Budget Resolution (March 2007) .............. 19 B. The Fiscal Year 2009 Congressional Budget Resolution (March 2008) .............. 23 C. Finance Committee Hearings ................................................................................ 24 VII. The 111th Congress (2009-2010) ................................................................................25 A. The First Pomeroy Bill (H.R. 436) ....................................................................... 25 B. The Arithmetic of the Estate Tax .......................................................................... 26 C. The Obama Administration’s Fiscal Year 2010 Budget Proposal ........................ 27 D. The Fiscal Year 2010 Congressional Budget Resolution ..................................... 28 E. The First Baucus Bill (S. 722) .............................................................................. 29 - ii - F. The McDermott Bill (H.R. 2023) ......................................................................... 29 G. Ways and Means Committee Engagement and the Second Pomeroy Bill ........... 30 H. Senate Refusal To Act in 2009 ............................................................................. 31 I. The “Responsible Estate Tax Act” ....................................................................... 32 J. The Second “Baucus Bill” .................................................................................... 33 K. The Deal Between the President and Some Congressional Leaders ..................... 34 L. The 2010 Tax Act ................................................................................................. 34 VIII. The Clarified and Modified 2010-2012 Law ...............................................................35 A. The Sunset in General ........................................................................................... 35 B. The Estate Tax Exemption and Rate ..................................................................... 36 C. The Election out of the Estate Tax into Carryover Basis for 2010 Estates........... 36 D. Indexing for Inflation ............................................................................................ 48 E. The GST Tax......................................................................................................... 49 F. Extension of Time for Performing Certain Acts ................................................... 52 G. The Gift Tax (and “Clawback”) ............................................................................ 53 H. Portability .............................................................................................................. 59 I. Comment ............................................................................................................... 64 IX. The 112th Congress (2011-2012) ................................................................................64 A. Another McDermott Bill ....................................................................................... 64 B. More Death Tax Repeal Permanency Bills ........................................................... 66 C. Senate and House Leadership Bills....................................................................... 66 X. The Climate After the 2012 Election ...........................................................................67 A. The 113th Congress (2013-2014) ......................................................................... 67 B. The “Fiscal Cliff” .................................................................................................. 67 C. Factors That Affected the Ability to Compromise ............................................... 68 D. Residual Discomfort with a High Estate Tax ....................................................... 68 E. Simple Math .......................................................................................................... 69 XI. The American Taxpayer Relief Act of 2012 ................................................................70 A. Enactment ............................................................................................................. 70 B. “Fiscal Cliff” Issues in General ............................................................................ 70 C. Estate Tax Provisions ............................................................................................ 71 XII. Following up Those 2012 Gifts ...................................................................................72 A. Renouncing, Refocusing, Reversing, Rescinding, Reforming, Refinancing ........ 72 B. Perfection and Implementation ............................................................................. 74 C. 2012 Gift Tax Returns .......................................................................................... 74 D. Uses of 2012 Grantor Trusts ................................................................................. 75 E. Calibrating the Overall Estate Plan to the 2012 Gifts ........................................... 76 F. Other Special Follow-Up of Gifts ......................................................................... 76 XIII. Otherwise Adjusting to a Permanent High-Exemption World ....................................77 A. Considerations in Making Post-2012 Taxable Gifts ............................................. 77 B. Portability .............................................................................................................. 78 C. Important Areas of Practice Besides Transfer Tax Planning ................................ 86 - iii - XIV. What We Learned from Those 2012 Gifts ...................................................................87