“This newsletter discusses the impending legislatively scheduled rollback of the Tax Cuts & Jobs Act (TCJA) legislation that temporarily doubled the transfer tax applicable exclusion amount (AEA) to $10,000,000, indexed back to 2018, and how planners should handle clients with respect to recommending and implementing large irrevocable transfers before January 1, 2026 to take advantage of the temporarily high AEA, when that automatic AEA rollback is scheduled to kick in. But will it?

This newsletter lays out the actual history of not only the temporary estate tax provisions, which began with the 2001 Tax Act, but also the so-called ‘Extenders,’ i.e., temporary income tax provisions that are regularly periodically to suggest that if history is any guide, the automatic rollback may not again ever go into effect-it’s never been allowed to do so. Paul defines ‘donor’s remorse’ and reviews a few malpractice actions that came out of planning before 2013, when the pre-2001 AEA and higher estate tax rates were supposed to return-but didn’t.”

In his commentary, Paul Hood reviews the impending legislatively scheduled rollback of the Tax Cuts & Jobs Act (TCJA) legislation that temporarily doubled the transfer tax applicable exclusion amount. Members who wish to learn more about this topic should consider watching Paul and Alan Gassman‘s upcoming webinar on this subject, “The Countdown to 2026: Designing, Presenting, and Implementing Large Transfers for Clients While Avoiding Donor’s Remorse and Malpractice Lawsuits” that will air on April, 4, 2024 at 2:00 PM EST. Click here for more information.

A native of Louisiana (and a double LSU Tiger), Paul Hood obtained his undergraduate and law degrees from Louisiana State University and an LL.M. in taxation from Georgetown University Law Center before settling down to practice tax and estate planning law in the New Orleans area. Paul has taught at the University of New Orleans, Northeastern University, The University of Toledo College of Law and Ohio Northern University Pettit College of Law. Paul has authored or co-authored nine books, including his most recent book, Yours, Mine & Ours: Estate Planning for People in Blended or Stepfamilies and hundreds of professional articles on estate and tax planning and business valuation. He can be contacted at paul@paulhoodservices.com.  

Here is his commentary:

EXECUTIVE SUMMARY:

This newsletter  discusses the impending legislatively scheduled rollback of the Tax Cuts & Jobs Act (TCJA) legislation that temporarily doubled the transfer tax applicable exclusion amount (AEA) to $10,000,000, indexed back to 2018, and how planners should handle clients with respect to recommending and implementing large irrevocable transfers before January 1, 2026 to take advantage of the temporarily high AEA, when that automatic AEA rollback is scheduled to kick in. But will it? Paul lays out the actual history of not only the temporary estate tax provisions, which began with the 2001 Tax Act, but also the so-called “Extenders,” i.e., temporary income tax provisions that are regularly “extended” periodically to suggest that if history is any guide, the automatic rollback may not again ever go into effect-it’s never been allowed to do so. Paul defines “donor’s remorse” and reviews a few malpractice actions that came out of planning before 2013, when the pre-2001 AEA and higher estate tax rates were supposed to return-but didn’t.

COMMENT:

Now that the calendar has turned to 2024, everyone is becoming more and more painfully aware that unless the Congress does something before January 1, 2026, the AEA rolls back to pre-TCJA levels as a base, $5,000,000, indexed back to 2018. In 2012, estate planners faced the same predicament of tax bills that aren’t filibuster proof and only have a shelf life of up to ten years under the Byrd Rule (more on that in a bit).

While the old disclosure “past performance is no guarantee of future results” remains relevant, in my opinion, simply advising clients to do estate planning because of the scheduled rollback arguably is naïve and/or irresponsible for many clients in light of the significant past history, especially since Congress has never allowed the temporary estate tax provisions with rollback to ever go back into effect-not in 2010 or 2012.

What’s the Byrd Rule, and Why it is Important? The Byrd Rule is named after late, long-time West Virginia Senator Robert C. Byrd (D-WV), and came into effect in 1985, as modified in 1990. The Byrd Rule restricts what can be included in reconciliation legislation in the Senate absent 60 votes, i.e., a filibuster-proof vote. At its core, the Byrd Rule prohibits provisions that are viewed as “extraneous” to the budget.

The Byrd Rule often forces Congress to pass legislation that “sunsets” or expires within ten years to comply with the prohibition against increasing deficits beyond the budget window. The 2001 tax cuts are an example of when the Byrd Rule drove the inclusion of this type of sunset in legislation.

Although the Byrd Rule technically only applies in the Senate, it impacts House legislation because it dissuades the members from including provisions in House bills that possibly run afoul of the Byrd Rule, i.e., not passable without a filibuster-free vote, i.e., at least 60 votes, in the Senate.

Leading Up To 2013. Recall the prevailing majority view back in 2012 that the AEA was going to go down dramatically by operation of law at the end of 2012, and the lack of agreement between the Congress (Republicans controlled both houses then) and the White House (then Democrat President Obama) as the end of 2012 frittered away, which caused many estate planners to resign themselves to that as the inevitable political reality.

In 2012, the vast majority of estate planning commentators were aggressively advising estate planners to encourage their clients to aggressively plan as if there was going to be a significant automatic reduction of the AEA beginning in 2013 back to $1,000,000. Based on this feeling and advice, 2012 was one of the busiest estate planning action years even as thousands of clients did significant amounts of irrevocable estate planning, culminating in a huge number of gift tax returns filed in 2013.

Panic among many estate planners often begins to set in when proposed tax legislation is introduced that, if enacted, would adversely affect their clients.

A Movie We’ve Seen Before?-A Few Times. Estate planners have seen this issue before in the fairly recent past, back in 2009-10 and 2012. Actually, since 2001, we’ve seen it a few times with the federal estate tax, going back to 2001/2003, but actually, at least with respect to the federal income tax, we’ve dealt with so-called Extenders since even before ERTA in 1981, although ERTA certainly increased the too-frequent practice of Extenders.^[i]

In 2010, the estate tax expired – briefly.

But, in December of 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, where the scheduled rollback of the estate tax AEA to $675,000, with graduated estate and gift tax rates of up to 55% (with the 5% surtax bubble between $10,000,040 and $21,040,000, which took away the benefits of both the entire AEA as well as the graduated rates, such that net estates that exceeded $21,040,000 were taxed at a flat 55% estate tax rate) got considerably softened upon the return of the federal estate tax in 2011, with an estate tax AEA of $5,000,000 (not $675,000 or $1,000,000) and a top estate tax rate of 35% (not 55%). Example 1 of Congress and a Democratic President not allowing the estate tax rate/AEA rollback to pre-2001 law/levels.

However, there was a very small number of estate planning commentators, the most vocal of which was me, who saw that cooler heads on Capitol Hill were eventually going to prevail to preserve the then existing level of AEA. I was advising any estate planner who’d listen to be circumspect and to be particularly cautious in advising clients on the fringe of estate tax applicability (wealth between $5-15 million) against doing significant irrevocable estate planning because of the very real probability that nothing was going to happen to the AEA before 2013.

But remember that despite lots of anticipatory irrevocable estate planning back in 2012 (the 2010 act merely kicked the scheduled return/rollback of the 2001 Tax Act can down the road to the end of 2012) done because of a widely held belief in the overwhelming majority of the estate planning community that the AEA was going to go down automatically and significantly, the politicians threw what was most likely too many planners a back buckling curveball (which I recognized immediately coming out of the pitcher’s hand, kept my hands back, and was on the pitch, lining it into the gap for extra bases) by its vote (Senate voted 87-9 in favor of the act in the wee hours of January 1, 2013), which President Obama signed into law on January 2, 2013.

The AEA, which just about everyone (save myself and maybe one or two other commentators and pundits) believed was going down significantly automatically beginning in 2013, actually went up significantly, and this was allegedly permanently.

And, for the second time, Congress didn’t allow the automatic rollback to pre-2001 law to stay in effect. Example 2. And there are no previous instances of the temporary estate tax provisions having automatically rolled back to pre-act law/rates/levels.

Scoreboard  Estate Tax Cuts 2 Rollbacks 0. Under the circumstances, why do so many planners nevertheless act as if the rollback will definitely occur when it has not happened with the previous estate tax temporary tax provisions, and on what basis do they act and so advise?

The Bottom Line-I strongly advise all planners who nevertheless advise clients to plan as if the rollback will definitely occur as per current law to have cogent answers to the above question for every such client. Given the history, I seriously doubt that a defense based on reliance on the literal law on the books, i.e. a rollback, will prevail. I certainly wouldn’t stake my professional career on such a defense under the circs.

Comments: Many clients were unhappy in 2013, having contracted serious cases of donor’s remorse, which I’ll define shortly, due to having done significant irrevocable planning in anticipation of a law change that didn’t happen. Lawyers and CPAs have been sued over it.

Donor’s Remorse-The Urban Dictionary defines donor’s remorse as follows:

The feeling you get after you have given money or merchandise that you have been scammed.

In 2013, some clients bitterly complained that their estate planners had coerced or convinced them to do significant irrevocable planning to avoid a scheduled law change that never happened. For a number of clients, irrevocable planning in the significant amount that many did was ill-advised because it adversely impacted the clients’ access to capital (a mortal sin-a violation of the beginning of the Hippocratic Oath to “first, do no harm,” which, in my opinion, will probably get you sued), notwithstanding the prospect of adverse legislative changes.

The problem of donor’s remorse also involves a separate yet related problem, which is that some clients were permitted to irrevocably transfer more of their wealth beyond their control than they should have from the standpoint of financial comfort, i.e., access to capital, all in the purpose of avoiding a tax, the federal estate tax, that they’ll never have to personally pay because it won’t be due until after the client (and/or the client’s spouse) have died.

In other words, the client needlessly limited his own access to his capital to avoid a problem that literally wasn’t his problem, actually belonging to his future heirs or legatees.

Lawsuits Over Donor’s Remorse-In one of the cases, a New Jersey-based real estate magnate family, not only sued their lawyers, in the Raia v. Lowenstein Sandler, et al. matter, but they also sued their CPAs, CohnReznick (but CohnReznick’s firm engagement letter had a mandatory arbitration clause that the Raias contested in court but lost, meaning that they had to first pursue arbitration). In Steve Leimberg's Estate Planning Newsletter No. 2725, which ran on May 16, 2019, Marty Shenkman, Sandra Glazier and Howard Zaritsky discussed the Raia’s then recently filed malpractice case against their former lawyers.

From the complaint, the Raia actions involved a malpractice claim that arose out of commonly used estate tax-driven planning techniques, including GRATs, gifts, and installment sales to dynasty trusts that were grantor trusts for income tax purposes.

The plaintiffs claimed that the loss of basis adjustment on the grantor’s death of the property sold to the grantor dynasty trust as well as the adverse income tax consequences that would be triggered on the change from grantor trust status to a complex trust were not sufficiently explained to them, if at all. The complaint repeatedly mentions the income tax consequences that will be experienced if and when grantor trust status is lost or toggled off.

In Jackson v. Calone,-the plaintiff hired defendant lawyer Calone and his law firm to do some fairly basic estate planning that involved a joint revocable trust and later a transmutation agreement to convert some property into community property (this is a federal case out of California), then later also gifting various assets to her son (at least some of which went into an irrevocable grantor trust for him).

The attorney's recommendation/participation in the transmutation and gifting was later alleged to be: "(1) professional negligence, (2) breach of fiduciary duty, (3) constructive fraud, and (4) financial elder abuse." [emphasis added]

The below quote from the court's order denying cross motions for summary judgment (essentially guaranteeing trial if the case doesn’t settle), which should greatly concern estate planners who could face a trial by jury:

More specifically, Plaintiff argues Defendant Calone fell below the standard of care by (1) failing to ensure Plaintiff had sufficient income before entering into the 2012 Trust, (2) failing to ensure that certain promises from Bill Jackson [her son] to Plaintiff were enforceable [having to do with paying the tax burden and reimbursement due to the irrevocable grantor trust], and (3) failing to include a toggle clause to allow Plaintiff to escape tax liability. [emphasis added]

Calone got himself into trouble by not being able to show that he had made sure that his former client had sufficient income/cash flow and capital access aside from what was gifted.  In short, Calone’s lack of formal process didn’t serve him well.

But in both cases, use of sufficiency and appropriateness tests before the planning would have helped the estate planners, indeed probably preventing exposure to a malpractice claim based on second-guessing.

All three cases remain pending to the best of my knowledge, information, and belief.

The moral of the story-Before assisting a client with any irrevocable parting of assets that is material, i.e., equals or exceeds 10% of the client’s net worth/income/cash flow, conduct a Solvency and Objective Financial Income/Cash Flow and Capital Access Sufficiency Procedure, document it in writing, and get the client’s approval of the results of the procedure in writing.  Appropriate spreadsheets or sophisticated software like EstateView can assist in compiling and analyzing this data and in testing multiple scenarios to expose problems on different facts.

Could 2012 repeat itself in 2026? Most estate planners hope to be right about the potential for legislative changes and have their clients be happy about their advice and work, thereby avoiding donor’s remorse. But, in all honesty, you’re shooting at a moving target when it comes to trying to plan in periods of uncertainty from the legislative landscape.

Remember that estate tax projections can be a bit squishy given the voluntary nature of the federal estate tax, such that an estate’s projected estate tax may be much higher than the estate’s actual federal estate tax. For proof, look back at client estate tax projections you did before even the TCJA but it gets even more lopsided for long-time clients who go back with the planner to before 2001. In my experience, relying on income tax /cash flow projections is much more reliable than relying on future estate tax projections, but it is best to view them in conjunction with one another.

Hopefully, the estate planning pundit and thought leader groups will be more circumspect about the high likelihood that the AEA will not automatically go down in 2026 than the commonly heard “Chicken Little” chant that led  many clients to take action in 2012. A number of clients now view that advice as having been self-serving because it generated estate planning work and fees for estate planners, and estate planners really can’t deny that they were compensated for planning work during 2012 in anticipation of the “guaranteed rollback on January 1, 2013.” that they advised was going to happen.

Based on prior Congressional experience with Extenders and the temporary estate tax provisions, it’s clear beyond cavil that Congress just hasn’t been inclined to allow automatic rollbacks of Extenders (very, very few Extenders have ever been permanently dropped) or estate tax temporary provisions to go back into effect.

So, What Do Estate Planners Tell and Do for Clients Leading Up To 2026? Estate planners generally have three categories of questions around proposed legislation.

·      First, what is the political likelihood for enactment (and permanence)?

·      Second, what substantive changes would the proposed legislation make?

·      Third, which of my clients would be adversely affected if the proposed legislation was enacted?

Unfortunately, too often, estate planners take up the second and third questions first without considering whether enactment of those changes is even likely. As a result, estate planners begin furiously learning about the proposed legislation as soon as possible, but too often blindly rely without independent analysis and confirmation on the advice of estate planning commentators.

Practitioners breathed a collective sigh of relief, believing that they’d dodged a bullet after the 2013 legislation at least until their clients got word about the bill and came to the realization that the irrevocable estate planning that their estate planner had recommended was done in anticipation of a legislative change that didn’t happen. And guess what? Many clients were very angry at their estate planners, and many had bad cases of donors’ remorse. Indeed, some clients sued their estate planners over these issues.

Fast forward to 2024. The estate planning community finds itself in a similar boat to 2012, facing potential adverse tax legislation in the form of automatic rollbacks on January 1, 2026.

Again, unlike the overwhelming majority of speakers and commentators, I foresee little likelihood of significant adverse legislative change in the transfer tax laws in 2026. In my opinion, that such a result is presently the law in effect is irrelevant under the circumstances.

I predict that the Congress is likely to continue to kick the can down the road another ten years (limited again by the Byrd Rule) by continuing the AEA at the TCJA level, as indexed back to 2018, thereby obviating the need to act quickly solely for legislative influenced reasons. With that said, estate planners may have other reasons for advising particular clients to act sooner rather than later.

In Steve Leimberg’s Estate Planning Newsletter No. 2882, which ran on April 27, 2021, Bruce Givner, a long-time tax and estate planning lawyer in Los Angeles CA, analyzed the political realities of enactment of major transfer tax legislation in 2021 and predicted similarly to me that there would be no significant transfer tax legislation in 2021.

Weaning itself a bit off of the breast of K Street, Congress finally made the IRA charitable rollover permanent in 2015, which had heretofore been caught up in that annual “will they or won’t they renew it” lobbyist annuity incestuous “Extenders” saga, which most non-partisan good government research/policy organizations have decried as being questionable tax policy. But simple research will reveal that some so-called “Extenders” have been successfully renewed 15 or more times. And the percentage of Extenders that ever get permanently dropped is microscopic.

One of the third rail issues for a career professional politician is voting for tax increases.  Allowing a scheduled tax law rollback to go into effect effectively is a vote to increase taxes, and members understand this.

Generally speaking, the career professional politician is more likely to vote for a tax increase only if their reelection is not imminent than they are with respect to the same piece of tax legislation when they are up for reelection soon. All other things being equal, it can be next to impossible to get even a career professional politician who doesn’t normally oppose tax increases to actually cast a vote for one during an election year for fear that the voters will toss them out on their ear for raising taxes.

As I said earlier, some of the clients who had bad cases of donor’s remorse have sued their lawyers and accountants. Strive mightily to not be in their number!!!

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Paul Hood

CITE AS:

LISI Estate Planning Newsletter #3111 (April 3, 2024) at http://www.leimbergservices.com. Copyright 2024 L. Paul Hood, Jr. Reproduction in Any Form or Forwarding to Any Person Prohibited - Without Express Permission. Our agreement with you does not allow you to use or upload content from LISI into any hardware, software, bot, or external application, including any use(s) for artificial intelligence technologies such as large language models, generative AI, machine learning or AI system. This newsletter is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided with the understanding that LISI is not engaged in rendering legal, accounting, or other professional advice or services. If such advice is required, the services of a competent professional should be sought. Statements of fact or opinion are the responsibility of the authors and do not represent an opinion on the part of the officers or staff of LISI.

CITES:

Tax Cuts & Jobs Act.