Effective Estate Tax Down in 2016 Returns, Spousal Bequests Up

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By Allyson Versprille

The effective estate tax rate for returns filed in 2016 decreased by 2 percentage points from the previous year, in part because of a bump in bequests to surviving spouses, IRS data shows.

Based on returns filed in 2016, 5,219 estates with a gross value of about $107.8 billion owed estate tax, according to Internal Revenue Service statistics released Oct. 10. Of that total, the amount of net estate tax paid was about $18.3 billion, which equates to an effective tax rate of about 17 percent. This is a 2 percentage point drop from the 2015 effective estate tax rate of about 19 percent.

Robert J. Lord, a tax attorney based in Arizona, pointed out that effective estate tax rates calculated using gross estate values can be misleading—and perhaps not as helpful as effective income tax rates—because a lot of estate planning involves reducing the size of the gross estate.

Additionally, deductions like the marital deduction can fluctuate from year to year based on whether a decedent is the first or second spouse in a married couple to die, Lord and Ronald D. Aucutt, a partner at McGuireWoods LLP and co-chair of the firm’s Private Wealth Services Group, told Bloomberg BNA.

Under current law, married couples have an unlimited marital deduction that allows partners to make interspousal transfers of property without incurring a gift or estate tax.

An increase in the marital deduction claimed may explain the drop in effective estate tax rate between 2015 and 2016 returns, Lord said. Bequests to surviving spouses more than doubled from about $11.3 billion in 2015 to $23.2 billion in the 2016 returns. When the bequests are subtracted out of the total gross estate, the effective tax rates for those years are nearly identical.

Repealing the estate tax has been a priority of President Donald Trump and was included in the Republican tax framework. Opponents against repeal argue that such a move would only benefit the wealthiest Americans. The 2016 data shows that estates worth $20 million or more paid 66 percent of the total $18.3 billion in taxes.

Receipts Lower Than Expected

For estate tax returns filed in 2016, taxable estates paid a combined estate tax and gift tax during life of about $19.9 billion, about 6 percent more than the $18.7 billion paid based on the 2015 filed returns.

The increase in tax receipts is barely more than 5 percent during a time period where asset values were increasing dramatically, Lord said, adding that the 2015 filed returns should primarily reflect 2014 decedents and the 2016 filed returns should reflect 2015 decedents.

“Not only did the folks already over the threshold see their estates increase more than 5% that year, but many others crossed the threshold into taxability because of the increase in values,” he said in an email.

The increase is likely less than expected because of planning that occurred in 2012, Lord said.

Many taxpayers planned use of defective trusts and family partnerships to leverage their $5 million exemption in fear that the American Taxpayer Relief Act of 2012 wouldn’t pass and the estate tax exemption would return to $1 million per person.

“That pushed a lot of that 2014-2015 timeframe appreciation down to the next generation, free of gift or estate tax,” Lord said.

The 2012 act was enacted and ended up maintaining the $5 million exemption per person indexed yearly for inflation. The act also allowed married couples to use a deceased spouses unused exemption, a provision known as portability.

Political Mismatch

Chuck Collins, director of the Program on Inequality and the Common Good at the Institute for Policy Studies, said he found it interesting that the IRS’s data seems to show a “political mismatch” between the states that pay the most in estate tax and support or oppose repeal.

California and New York are two of the top three states that pay the most in estate taxes and their legislators often vote to retain the tax, Collins said in an email.

At the same time, in places like Wyoming and South Dakota where there are fewer taxable estates, there is solid support for repeal, he said.

To contact the reporter on this story: Allyson Versprille in Washington at aversprille@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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