The estate tax isn’t relevant to the vast majority of advisers, their clients or America at large. And estate planners say the tax is largely optional for the wealthy, since there are plenty of ways to dilute it greatly or avoid it outright.
However, there’s still a movement by some groups to end what they call the death tax, as demonstrated Monday when about 30 Republican senators sponsored a bill to permanently end it.
“It’s the government’s final insult to force grieving families to visit both the undertaker and the IRS on the same day,” said Senate majority leader Mitch McConnell, R-Ky., a co-sponsor of the Death Tax Repeal Act of 2019.
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However, the push to overturn the tax isn’t necessarily founded in reality. First, hardly any families pay the tax, a 40% federal levy. There were 11,300 estate-tax returns filed in 2018, and only half of those were taxable, raising $20 billion in revenue.
The recent tax law greatly reduced the number of people subject to the tax, since it doubled the threshold governing how much of an estate is taxable. Individuals and married couples only had to pay tax on estate values exceeding $11.2 million and $22.4 million, respectively, in 2018.
The Urban-Brookings Tax Policy Center projects that 4,000 estate-tax returns will be filed this year, only 1,900 of which will be taxable — a third of last year’s total. That would mean only 0.07% of the roughly 2.7 million deceased in 2018 will pay estate tax, according to the Tax Policy Center.
That’s a stark contrast with the state of affairs in the early 2000s, when the threshold was much lower and more than 50,000 individuals or families paid estate tax.
“It’s all but repealed already,” said Richard Behrendt, an estate planning attorney.
Further, the super wealthy and their advisers have plenty of tools at their disposal, such as planning strategies and avoidance techniques, to water down the estate tax.
“Some practitioners say the estate tax is an optional tax,” said Charlie Douglas, who runs an Atlanta-based family office.
These strategies often involve the use of trusts, which include a multitude of options. One common instrument: a grantor retained annuity trust.
Business titans such as Facebook CEO Mark Zuckerberg, the Walton family of Wal-Mart fame, Goldman Sachs chairman Lloyd Blankfein, and the Trump family have used these vehicles to remove wealth from their estate and transfer it to children, who inherit that wealth free of estate tax.
Wealthy individuals can also transfer stakes in family-controlled businesses, as well as securities held in a business like a limited partnership, at a discounted valuation — thereby reducing taxes due upon transfer of these assets during life or at death. The Trump administration quashed an Obama-era rule that would have scrapped the ability to do this, which some see as a tax loophole.
To avoid estate tax altogether, wealthy people can give the portion of an estate valued above the threshold amount to charity. Opponents of the tax have nonetheless been trying to kill it for years, calling it an unfair tax that punishes hard-working families. Proponents feel that, without the tax, wealth concentration would spiral even more out of control.
Spiking the tax seems infeasible in the current political environment, given Democrats’ control of the House of Representatives. Democrats have been more interested in imposing more taxes on the wealthy. Sen. Elizabeth Warren, D-Mass., for example, recently proposed households pay a 2% annual tax on each dollar of their net worth above $50 million.
“Wealthy people feel that Trump was the last hope of repealing the estate tax, and if he couldn’t get it repealed then it’s not going to get repealed,” said Martin Shenkman, founder of Shenkman Law.
