Preparing for 2011 - What Happens as the Sunsets on EGTRRA?

  

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By:Lewis W. Dymond, Jr., J.D.
Principal
WealthCounsel 

President George W. Bush signed into law the “Economic Growth and Tax Relief Reconciliation Act of 2001” on June 7, 2001.  At that time Title V, the estate, gift and generation-skipping transfer tax provisions of EGTRRA, was heralded as the phase out of the “death tax.”

EGTRRA 2002 – 2009 (the phase out period)

The estate tax unified credit exclusion, which was $675,000 in 2001 but scheduled to incrementally increase to $1 million in 2006, was instead increased to $1 million in 2002, $1.5 million in 2004, $2 million in 2006, and $3.5 million in 2009.  The maximum estate, gift, and generation-skipping transfer tax rate, which was 55% in 2001 (with an additional 5% for estates over $10 million in order to eliminate the benefit of the lower estate tax brackets) was reduced to 50% in 2002, with additional 1% reductions each year until 2007, when the top estate tax rate became 45%.  Only $1 million of the unified credit exclusion could be applied to lifetime gifts despite the increases in the estate tax exclusion.

The state estate tax credit, a form of revenue that share a portion of the federal estate tax with state governments, was phased out between 2002 and 2005 and replaced by a deduction for state estate taxes in 2005. 

EGTRRA 2010 (the repeal)

Under EGTRRA the repeal of the federal estate tax and the generation-skipping transfer tax occurred in 2010.  The gift tax was not repealed and the lifetime gift tax exclusion remains at $1 million, but the gift tax rate is reduced to 35% in 2010.

With the repeal of the estate tax came new complicated “carry-over basis” provisions of IRC §1022 replacing the “step-up in basis” provisions of IRC §1014.

2011 – The Sunset on EGTRRA (the resurrection)

Title IX – Compliance with Congressional Budget Act, Section 901 of EGTRRA provides that EGTRRA will sunset on January 1, 2011 and we will revert to what the law would have been if EGTRRA had never been passed. 

Following President Bush’s reelection in 2004 efforts were made to make the repeal of the estate tax scheduled for 2010 permanent, but those efforts failed.  With the Democratic majority in Congress after the 2006 election, efforts for permanent repeal of the estate tax changed to efforts to avoid estate tax repeal in 2010.  In 2009 efforts to avoid estate tax repeal in 2010 by establishing a permanent unified credit amount and estate tax rates at the 2009 EGTRRA levels of $3.5M unified credit and 45% estate tax and GSTT rate failed in the Senate primarily for lack of bipartisan support.

At this time with the budgetary restrictions of PAYGO requiring that reductions in revenue be offset by corresponding reductions in expenditures, it would require bipartisan support in the Senate to avoid a complete sunset of EGTRRA in 2011.  This means that in all probability, 2011 will bring the return of a $1 million unified estate and gift tax credit, a $1.34 million GST exemption and maximum estate tax and GSTT rates of 55%. 

What this means to us as estate planning attorneys

Estate tax motivated estate planning will increase dramatically.  Even modest sized estates will now have to plan for the possibility of a significant estate tax hit at the time of death.  We will need to re-sharpen not only our basic A/B tax planning but also all of our more advanced planning strategies.

As we find that estate-tax-motivated reasons for planning increase, we will need to be careful not to let the estate tax “tail” wag the estate planning “dog.”  As estate-tax-motivated reasons for estate planning decreased with the increasing exemption amounts under EGTRRA, successful estate planning attorneys learned that non-tax motivated reasons for planning were just as strong and in many cases more rewarding than the purely tax-motivated reasons.  We will now need to be careful not to lapse back into the comfort of doing purely tax-motivated planning.

Continued Uncertainty

The estate tax will continue to be a hot political issue beyond 2010.  There are just too many winners and not enough losers if EGTRRA is allowed to sunset:

Winners

Democrats – Increased revenues will help offset continued increasing budget deficits.

Republicans – Campaigning for a repeal of the estate tax continues to be an effective fundraising issue.  A permanent resolution of the estate tax issue would “kill the Golden Goose.”

Insurance Companies – Use of ILITs funded by life insurance policies will again become a popular estate planning tool to pay for the estate tax and preserve the estate.

Charities – estate tax motivated charitable planning will again become popular.

States – a return of the state death tax credit will provide many states with much needed revenue.

Losers

Heirs – of those who fail to plan.

The political posturing of the estate tax issue has changed from the early Bush years of calls to repeal the “unfair and unjust death tax” to “not giving a tax break to the very wealthy.”  It is unlikely that we will see bipartisan political agreement on any meaningful long-term “estate tax reform” in the near future.

This means that the uncertainty that existed during EGTRRA will continue.  Fortunately, drafting to deal with uncertainty by incorporating flexibility is familiar to WealthCounsel members and the WealthDocx drafting system.

A Glimpse into the Future

As a means of dealing with change and insuring that a client’s estate plan stays up to date, we may see a number of attorneys and firms moving away from terminating the estate planning engagement upon delivery of the estate planning documents and moving toward continuing the engagement (and the client relationship) by adopting some form of a client maintenance program.

Please share your thoughts about this topic in the comment section below.