As I talk about why estate planning is crucial, I’m sometimes politely challenged with a reminder that most people are likely to have taxable estates with a total value far under the current federal exemption from the estate tax.
That objection is understandable and based on some truth. In 2019, as I type this, there is an exemption from estate taxes available for the taxable estates of individuals that are valued up to approximately $11.4 million or for married couples with a taxable estate valued up to approximately $22.8 million or less. But, the applicable exemption is hardly grounds for concluding that tax ramifications are no longer a critical concern in estate planning for individuals or married couples with smaller estates. It is hard to find shiftier ground to rely on than the somewhat arbitrary permissible exemption. Consider the exemption levels in years past:
- $1,500,000 in 2004 – 2005;
- $2,000,000 in 2006 – 2008;
- $3,500,000 for decedents dying in 2009;
- and $5,000,000 or more for decedent’s dying in 2010 and 2011 (note: there are special rules for decedents dying in 2010);
- $5,120,000 in 2012,
- $5,250,000 in 2013,
- $5,340,000 in 2014,
- $5,430,000 in 2015,
- $5,450,000 in 2016,
- $5,490,000 in 2017,
- $11,180,000 in 2018, and
- $11,400,000 in 2019.
While some may point out that ever-changing has also meant consistently increasing in recent history, I don’t think such a trend can be counted on in the near future for several reasons.
First, while most states, including California, do not have an estate tax, most states are currently looking to get in on the estate tax game at significantly lower levels than the federal exemption. That’s true of California where State Senator Scott Wiener introduced SB 378, which would effectively lower the exemption to $3.5 million for an individual or $7 million for a married couple. Weiner admits that his bill would need an additional approval from voters because of an earlier ballot initiative, but that the vote could take place in 2022.
Second, there is a progressive movement or “Democratic Socialist” political movement nationally that has at least two devoted members running for President and considerable support in the House of Representatives. That movement is every bit as much about redistributing wealth as it is about collecting revenues. In other words, the modern consensus that lowering the estate tax exemption isn’t economical because the relatively small increased revenues are outweighed by the many objections is not nearly as likely to be persuasive as these leaders command more power and influence. At first blush, a truly progressive takeover of federal tax policy seems unlikely, but consider that in almost every national poll, the two most progressive candidates for president in the 2020 Democrat primary, Elizabeth Warren and Bernie Sanders, combined have been consistently polling more than leading “mainstream” Democrat Joe Biden. These candidates have promised trillions of dollars in additional social programs that must be paid for by additional revenues. Lowering the estate tax exemption seems like an obvious outcome if a progressive candidate wins. And, all presidential elections in recent history have been close. The unthinkable is not at all unimaginable and may not even be all that unlikely.
Most of my clients hire me for estate planning for reasons other than tax planning at this stage. In fact, when I occasionally ask what whether passing on their wealth to their children or passing on their values their children is more important to them, most tell me their values are more important. That’s a good answer, and one I personally agree with. But, the best answer is that both are important and tax planning should and does remain an integral part of our estate planning process.