Whether I am out speaking to a group or meeting with clients, I always stress that one of the difficulties of planning is that elected officials are constantly changing the rules on us. With the stroke of a pen, the best and most carefully crafted planning can be rendered moot. The President’s proposed budget is a reminder of this fact; especially as it pertains to estate tax planning.

The history of the estate tax exemption and the estate tax rate is a long and winding road fraught with political acrimony and uncertainty. In 1997, the exemption amount was $600,000 and the rate was 55%. That meant that estates below $600,000 were not subject to the federal estate tax. Estates in excess of $600,000 were subject to federal estate tax at a top rate of 55%. From 1997 to 2002, the exemption rose to $1 million while the rate dropped from 55% to 50%. From 2002 to 2006 the exemption rose to $2 million while the rate dropped to 46%. The exemption stayed at $2 million until 2009 when it was raised again to $3.5 million with a 45% tax rate. In 2010, there was no federal estate tax; it just disappeared for a year. Then on January 1st, 2011, the federal estate tax came back with a $1 million dollar exemption. However, that was soon changed to a $5 million dollar exemption retroactive to the beginning of the year with a 35% rate. However, that exemption was for only two years and expired on January 1, 2013.

As part of the so-called fiscal-cliff budget deal reached between the President and Congress earlier this year, the estate tax exemption was set at $5.25 million adjusted for inflation. At the time, both sides said the exemption was permanent. However, permanent does not mean the same thing in Washington as it does everywhere else.

The President’s budget proposal – just released -  calls for returning the estate tax exemption to 2009 levels in 2018. That would reduce the exemption from $5.25 million adjusted for inflation to $3.5 million and raise the top estate tax rate from 40% to 45%.

The proposal still has a ways to go before it becomes law. However, it illustrates my point that planning is an ongoing process that needs to take into account the changing rules given to us by Washington.

If you need help navigating the ever-changing world of estate taxes, give us a call today at (763) 420-5087.

Chuck Roulet
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Nationally Recognized Estate Planning Attorney, Author, and Speaker