by Michael Graham
During the first few weeks following the Presidential election, blogs and list serves were full of predictions for an immediate permanent repeal of the Federal estate and generation-skipping tax system, with retention of the gift tax system to protect against indiscriminate income tax shifting.
Many also predicted that permanent repeal of estate tax would be the end of estate planning as a profitable area of the practice of law. Inherent in that second prediction is an assumption that motivation for estate planning is solely tax based.
As Yogi Berra famously said, “It’s tough to make predictions, especially about the future.”
First, before considering the possible impact of a complete repeal of estate tax, consideration of the difficulty of complete repeal is in order. The obstacles to accomplishing permanent repeal are substantial, and temporary repeal has substantial roadblocks. While America spoke through the Electoral College at the voting booth, Donald J. Trump has been an anathema to the mainstream elected Republican majority. His elevation to President Elect does not seem to have changed many minds among elected Republicans. To accomplish even temporary repeal, President Elect Trump must now play on elected Republican turf, that is, the House and Senate, and as someone in my home state of Texas once said, “Politics is a contact sport.”
Further, the famous Byrd Rule in the Senate, named after Senator Robert Byrd, creates a point of order requiring a 3/5th vote of the Senate (60 votes) to overcome. The Byrd Rule is the reason always given for why the President George W. Bush (43) phased in repeal in 2001 disappeared at the end of 2010. While beyond the scope of this short article, the Byrd Rule prohibits consideration of “extraneous matters” in a budget reconciliation bill, amendments thereto, and reconciliation conference reports. The rules for whether or not a matter is extraneous, and the exceptions to the rule, can be found at: Summary of the Byrd Rule.
Plus, while the transfer tax revenue is small in comparison to other measures, it is still material. Even with a Republican majority, there is some limit on how much deeper the deficit can be allowed to go, and balancing income tax reductions against estate tax repeal is a likely battleground.
Finally, at least tongue in cheek, I believe that the majority of Americans still believe in an estate tax, they just think it should only start at a level higher than anything they are likely to inherit.
Perhaps more important, the American Taxpayer Relief Act of 2012 already brought about permanent repeal of the estate tax system for most estate planning lawyers and their clients. With that act, (i) the estate tax exemption was set to an indexed $5,000,000 per individual, and (ii) portability of unused estate tax exclusion between spouses was enacted. Most Americans were removed from the estate tax system; at least for Will and trust drafting purposes, since an outright gift to the spouse at death would (pardon the simplification of inflation adjustments and the like) protect ten million of asset value from estate tax at the death of the second to die.
Since 2012, has there been less estate planning? It seems to me, at least in my practice and in those practices that I see regularly with our various tribe members (subscribers to the InterActive Legal Suite of Drafting and Practice Systems), that while the nature of the documents has changed, the volume of clients has not.
Further, relevant experience shows that the documents have not been less complicated since 2012. The nature of the drafting has changed, so that often all property is left to a single QTIP trust rather than inclusion of complex formulas to divide assets between a bypass trust, a QTIP trust, and a reverse QTIP trust. But these introduce the need for additional thought and options, rather than simplification. Most would agree that it is more complicated now than prior to 2012.
Despite the effective repeal of estate tax for most, it is rare to see a couple simply leave everything to each other outright, free of trust. Asset protection, subsequent remarriages and potential commingling of property with that of later spouses all still resound strongly with our clientele. These are not tax issues. Also, the lack of need for compliance with the Federal estate tax marital deduction rules for trusts, and not having to worry about an inadvertent general power of appointment, allow and require the estate planner to be more flexible in accomplishing the client’s desires. These are important details in a client’s mind, and these details make it all the more necessary to be able to draft sophisticated documents quickly with substantial options easily at the estate planners hand to meet the client’s needs.
Despite what I refer to as effective repeal in 2012, or the possibility of actual repeal in 2017 or thereafter, there are several clear inescapable facts:
- Not one less person will need a Will or revocable trust (often fully funded) in 2017, whether or not repeal is accomplished. Powers of Attorney, Health Care Documents, HIPAA authorizations, Designations of Guardian, Authorizations for Disposition of Remains, and Living Wills (Directives to Physicians) will all be needed. The need for various forms of creditor protection will be in high demand as we become a more and more litigious society.
One might wish to consider these points:
- The mortality rate is not dependent upon the existence of an estate tax.
- There will be just as many divorces, second and third marriages, and children by prior marriages. This fact alone seems may be a far greater motivational factor for planning than the possibility of a tax at death paid by someone else (after death, they are no longer the decedent’s assets).
- The continued increase in the number of couples living together for extended periods of time without marrying creates additional complexity, for marriage has always been the standard by which rules are set and rights are established.
- There will be just as many children of great promise, and children of great challenge, requiring special drafting considerations unrelated to taxes.
- America is aging. Medicaid Planning is only a small subset of Elder Law. As the population ages, there are more people recognizing their vulnerability to death, disability, and fraud. Senior citizens (regardless of wealth) almost universally develop a need to see their story told, and their legacy (financial and otherwise) stewarded and perpetuated within the family construct. They need Wills, funded revocable trusts, planning documents, and people to listen to their story and make sure the documents fit what they need and want.
- The increase in elderly in America (as a result of better health care and the baby boom of the late 40s and 50s) results in their children and grandchildren being exposed to the fact that the mortality rate in humans continues, despite advances in health, to be 100%.
- Finally, it strains credibility to say that the truly wealthy will quit estate planning if the estate tax is repealed. Whether or not the repeal is called permanent, it is reasonable to believe that transfer tax in the form of an estate and generation-skipping tax will be brought back with future changes in the White House and the Congress. In the meantime, it is at least as likely that the truly wealthy will want to take advantage of this “tax holiday” to create trusts for children and grandchildren until the “mind of man runneth not to the contrary” as my first year property professor, Dean Angus McSwain, was fond of saying (quoting William Blackstone).
Whether or not any repeal is likely, and if repealed, whether it will be permanent or temporary, we cannot know. But we do know that for most Americans, and most estate planning lawyers, repeal already occurred in 2012. Has that killed estate planning as a viable legal career? It does not seem so. In fact, based upon the interest in our area by Internet based providers such as Legal Zoom and Rocket Lawyer, the expectation is that it will be a very fast growing area.
My suggestion? Think about what you say to your clients. What are their real interests? Was the possibility of estate tax after both clients have died, to be paid by someone else, really the motivating factor? Was it not instead protecting their children and grandchildren from the probate process, creditors, divorce, substance abuse, and a tendency to buy everything in sight?
It continues to be difficult to make predictions, especially about the future, but we will certainly see the further aging of America and a change of focus in Washington. We live in interesting times.