The Tax Cuts and Jobs Act (TCJA),17 signed into law on December 22, 2017, was the most significant change in the federal tax law since 1986. Although the TCJA did not abolish the federal estate tax, it nearly doubled the federal estate and gift tax exemption through December 31, 2025—rendering the estate tax moot for most taxpayers. In 2017, the federal estate and gift tax exemption was $5.49 million. Today, US citizens and domiciliaries enjoy an exemption of $11.4 million (adjusted for inflation) from estate and gift tax.18 The US federal estate tax is currently imposed at a maximum rate of 40%.19 Although the TCJA increased the estate and gift tax exemption, this increase is due to sunset at the end of 2025 and, unless further action is taken by Congress, the estate and gift tax exemption will revert to $5 million (adjusted for inflation) effective January 1, 2026.
Although many commentators question whether the estate and gift tax exemption will revert to $5 million (adjusted for inflation),20the status of the estate tax will likely depend on the outcome of the 2020 presidential election. A number of Democratic candidates who have announced that they are seeking the nomination for presidency in 2020 are calling for significant changes to the federal estate tax. Such changes could result in a decreased federal estate tax exemption coupled with a higher maximum rate of tax. If a Democrat wins the White House in 2020, this change could occur before the existing exemption is due to sunset in 2025. Below is a summary of the federal estate and gift tax proposals set forth by the Democratic candidates.
Senator Bernie Sanders
In January 2019, Senator Sanders introduced the 99.8 Percent Act,21 legislation that would decrease the estate tax exemption and increase the estate tax rate. Senator Sanders' proposal would allow a unified estate and gift tax exemption of $3.5 million (adjusted for inflation) and increase the maximum rate of estate and gift tax to 77%. Under Senator Sanders' proposal, the rate of estate tax would increase for estates22 over $750,000 as follows:
- a 39% tax on the value of an estate in excess of $750,000
- a 45% tax on the value of an estate in excess of $3.5 million
- a 50% tax on the value of an estate in excess $10 million
- a 55% tax on the value of an estate in excess of $50 million
- a 77% tax on the value of an estate in excess of $1 billion
Senator Sanders' Act also outlines several changes to the generation-skipping transfer tax (GST Tax)23 and the taxation of "grantor trusts" and "grantor retained annuity trusts" (GRATs).24Additionally, Senator Sanders' proposed Act would limit the ability to take certain valuation discounts. Collectively, these changes would make it more difficult for wealthy families to engage in lifetime planning aimed at sheltering wealth from estate tax.
Senator Elizabeth Warren
Prior to declaring her candidacy, in September 2018 Senator Warren proposed the American Housing and Economic Mobility Act of 2018,25 which would decrease the unified estate and gift tax exemption to $3.5 million (adjusted for inflation). Under Senator Warren's proposal, the rate of estate tax would increase for estates over $1 million as follows:
- a 55% tax on the value of an estate in excess of $1 million
- a 60% tax on the value of an estate in excess of $13 million
- a 65% tax on the value of an estate in excess of $93 million
- For estates in excess of $1 billion, a 10% surtax would apply after the computation of tax pursuant to the above rates.
It bears noting that Senator Warren, similar to Senator Sanders, is also proposing dramatic changes to the taxation of grantor trusts and GRATs, including requiring a 10-year minimum term for GRATs.
Additionally, Senator Warren is also proposing an annual "wealth tax" on individual taxpayers with a net worth in excess of $50 million.26 Under the proposed wealth tax, individuals would incur a 2% annual tax on every dollar of their net worth that exceeds $50 million, which tax would increase to 3% for every dollar of an individual's net worth in excess of $1 billion. The wealth tax proposed by Senator Warren faces a number of legal hurdles, including constitutional concerns.
Senator Cory Booker
Prior to declaring his candidacy, Senator Cory Booker introduced the American Opportunity Accounts Act27 in October 2018, which, similar to Senator Sanders' and Warren's proposals, would decrease the unified estate and gift tax exemption to $3.5 million (adjusted for inflation). Under Senator Booker's proposal, the rate of estate tax would increase for estates over $1 million as follows:
- a 45% tax on the value of an estate in excess of $1 million
- a 55% tax on the value of an estate in excess of $10 million
- a 65% tax on the value of an estate in excess of $50 million
Similar to Senator Sanders' and Warren's proposals, Senator Booker's proposal would require a 10-year minimum term for GRATs, significantly limiting their utility.
Other Democratic Candidates28
There are a number of other candidates that are seeking the Democratic nomination for president in 2020 but have no stated policy with respect to the estate tax. As of March 14, 2019, the other Democratic candidates include:
- Mayor Pete Buttigieg
- Former Secretary of Housing and Urban Development Julian Castro
- Representative John Delaney
- Representative Tulsi Gabbard
- Senator Kirsten Gillibrand
- Senator Kamala Harris
- Former Governor John Hickenlooper
- Governor Jay Inslee
- Senator Amy Klobuchar
- Former Representative Robert Francis (Beto) O'Rourke
- Marianne Williamson
- Andrew Yang
Representatives Delaney, Gabbard, and O'Rourke, along with Senators Harris, Gillibrand and Klobuchar all voted against the TCJA. Although a number of Democrats took issue with several provisions in the TCJA, many Democrats see the estate tax as a way to raise revenue while imposing tax on only the wealthiest taxpayers.
2020 and Beyond
The temporary increase in the estate and gift tax exemption raises the issue of whether a reversion to a lower exemption amount (either as a result of the TCJA sunset or an overhaul of the TCJA) would retroactively deny taxpayers who die after December 31, 2025 the benefit of the higher exemption amount for gifts made from January 1, 2018 through December 31, 2025. The IRS has indicated in a Proposed Regulation that it will not retroactively "clawback" gifts made during this period should the exclusion amount decrease in the future.29
In sum, the estate and gift tax exemption is currently at an all-time high of $11.4 million, but is set to automatically revert to $5 million (adjusted for inflation) effective January 1, 2026 regardless of the outcome of the 2020 election. Meanwhile, the 2020 election could bring a Democratic administration that lowers the exemption to $3.5 million immediately, meaning that the increased exemption may not last through 2025. Given the temporary nature of the increased exemption and the uncertain political environment, many practitioners are advising clients to make gifts now, while the increased exemption amount is still available.
17 An Act to provide for the reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, Pub L. No 115-97§11061, State 2054 (2017).
18 Rev. Proc. 2018-57.
19 IRC § 2001.
20 In 2013, the estate tax exemption was set to revert to $1 million down from $5.12 million, however, legislation was passed that increased the federal estate tax exemption to $5.25 million.
22 For purposes of this article, "estates" means the amount calculated pursuant to IRC § 2001(b) and includes adjusted taxable gifts.
23 The GST Tax is a tax imposed on transfers (either outright or in trust) to anyone who is more than 37.5 years younger than the donor or to related persons more than one generation younger than the donor, such as grandchildren. IRC §§ 2611 & 2613(a).
24 GRATs are a popular estate planning tool that, if structured properly, allows the grantor (i.e., person who contributes the assets to the GRAT) to transfer the assets in the GRAT to the remainder beneficiaries on a tax-free or nearly tax-free basis.
26 Sahil Kapur & Laura Davison, Elizabeth Warren's Tax Proposal Aims at Assets of Wealthiest Americans, Bloomberg (Jan. 24, 2019).
28 Michael Bloomberg, Eric Holder, Former First Lady Hillary Clinton, and Senator Jeff Merkley have all announced that they will not seek the Democratic nomination for the 2020 presidency. Lisa Lerer & Astead W. Herndon, Why Did Four Top Democrats Just Say No To 2020? NY Times (Mar. 6, 2019). As of March 7, 2019, Joe Biden has not announced if he will seek the Democratic nomination for the 2020 presidency.
29 Proposed Regulation Section 20.2010-1(c).
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