The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) did repeal the federal estate tax – for a single year – 2010. The estates of oil & gas tycoon Dan Duncan (approximate net worth $9 billion), Yankees owner George Steinbrenner ($1.15 billion), and Glen Bell of Taco Bell fame, all of who died in 2010, were not subject to the federal estate tax. But, if you are reading this in 2011 or later, the repeal did not apply to you. If your estate is over $5 million (about 0.05% of Dan Duncan’s), federal estate taxes remain a concern in your estate planning.

With the passage of the the Taxpayer Relief Act of 2012 (TRA 2012), passed January 2, 2013, the applicable exclusion amount (your “estate tax exemption”) was permanently set at $5,000,000 as of 2012, with inflation adjustments for future years. The applicable exclusion amount for persons dying in 2017 is $5,490,000. There is a flat estate tax rate of 40% on all amounts over the exclusion amount. There is no outright estate tax repeal on the horizon.

For the first time since 2001, we have a “permanent” estate tax system in place, and clients are finally able to plan their estates with relative certainty as to whether and to what extent they will need estate tax planning.

With a national debt of over $18 trillion ($18,000,000,000,000), unfunded liabilities for federal entitlement programs dwarfing even that staggering sum, it is very possible that there may be legislation reducing the exemption and/or increasing the rate in the future. We therefore continue to urge our clients to take prudent steps to disinherit the IRS.

TRA 2012 made permanent a “portability” provision allowing the carryover of a predeceasing spouse’s unused estate tax exemption to the surviving spouse (new IRC Section 2010(c)(3)) if certain conditions are met. We can discuss this during your planning. We believe that in most cases married clients are best served by sticking with traditional estate tax planning methods and using portability as a backup.

Moral #1: Single individuals and married couples whose assets (after including the proceeds, not just the cash value, of any life insurance) exceed $5,000,000 are advised to take reasonable and prudent steps to minimize estate taxes, and to consult with their estate tax planning advisors about the possible ramifications of the new law to their planning, even if they already have estate planning documents in place.

Reduction, Elimination and Reinstatement of the State Death Tax Credit.

To a large extent the states, not the federal government, paid for the estate tax cuts in the 2001 EGTRRA. Because of the state death tax credit under prior law, a significant portion of the “federal” estate tax wasn’t paid to the federal government at all, but to the states, many of which, including Florida, had “sponge” or “pickup” state estate taxes that only imposed a tax to the extent creditable against the federal tax. Florida alone was collecting almost $800,000,000 per year, and this amount was expected to exceed $1 billion annually.

EGTRRA reduced the credit to 75% of its former level in 2002, 50% in 2003, and 25% of 2004. Beginning in 2005, the credit was replaced with a deduction for state death taxes.

This meant that Florida and other states with only a “sponge” or “pickup” estate tax suffered a drastic and immediate reduction in revenues, and received nothing after 2004.

In reaction to EGTRRA, many states which had a “sponge tax” changed their laws to reimpose their own independent estate or inheritance taxes, or “decoupled” by imposing a tax equal to the amount they would have received as a credit under pre-EGTRRA law with only a $1,000,000 exemption.

The net effect has been a balkanization of death tax systems across the country, a potential disaster for families of decedents with real property and other assets in multiple states and/or other indications of unclear domicile.

However, Florida cannot enact a standalone estate tax. Article VII, Section 5, of the Florida Constitution prohibits a state estate tax that is not directly creditable against the federal tax on a dollar for dollar basis.

Moral #2: If you moved to Florida from another state and consider yourself a Florida resident, you may be well advised to have a Florida attorney review your estate plan and personal situation to ensure that you haven’t given your state of origin an excuse to claim that you never really “left” and try to impose its own inheritance/estate tax and, just as importantly, back state income taxes, on your estate.

Enhanced Federal Gift Tax and GST Exemption. Under EGTRRA, the federal gift tax was never repealed at all. The applicable exclusion amount for gift tax purposes remained at $1,000,000 from 2002 through 2010. For 2011 and 2012, this amount was increased to $5,000,000 (same as the estate tax exemption). Beginning in 2013, the gift tax and GST (“generation skipping transfer”) exemption is the same as the estate tax exemption ($5,490,000 in 2017).

This increased gift tax and GST exemption gives wealthier clients the ability to make multi-million dollar gifts to dynasty trusts for their children, grandchildren, and later generations that will not be subject to federal estate or generation skipping transfer taxes for up to 360 years, without incurring a current gift or GST tax.

Moral #3: Those seeking to make substantial transfers to reduce their estates for estate tax purposes should consult the appropriate tax professionals.

More adventurous clients want to consider sophisticated “leveraged” transactions to make such transfers to minimize use of their applicable exclusion amounts.