Taxes, Heisenberg and the Uncertainty Principle
January 1, 2023 | View PDF
Many years ago, a physicist named Werner Heisenberg formulated a rule called the “Heisenberg uncertainty principle.” No, it has nothing to do with cooking meth. It is a useful principle in physics, and it has to do with not being able to accurately measure the position of an object, and its direction, at the same time. But for my purposes today, we don’t need to get too far into the science.
For scientists, a recognition of uncertainty – the limitations of measurement, the effect that measuring something has, the possibility that your sample is too small – is a valuable and important check on the tendency to jump to conclusions too quickly.
But that’s science. In estate planning, uncertainty is just a big old pain in the butt.
If I wanted to formulate an uncertainty principle for estate planners, it would be this: “Everything I do is based on the assumption that the law does not change. But the law does change.”
And of course, we can’t know when or how the law might change. Nowhere is this more evident than in planning for estate taxes.
Under the arcane rules of the U.S. Senate, if they want to pass a tax bill without having a supermajority, it can only last for a maximum of eight years. At that point if it doesn’t get extended, it expires and we go back to whatever the previous rule would have been.
So when George W. Bush came into office, Congress passed a temporary tax bill that increased the estate tax exclusion – the amount below which you don’t have to pay any estate tax – on a gradually increasing scale from $1 million all the way up to $3.5 million. But it was temporary, and in 2010 it was scheduled to drop all the way back to $1 million. So if you had over $1 million in assets, you didn’t know whether you should take some serious actions to avoid the whopping 40% estate tax, or whether you should just wait and see, and hope they would extend it.
And then in 2010, when those temporary increases were about to expire, President Obama signed a bill that extended the higher exclusion, at $5 million exempt, for two more years. But again, if a future Congress didn’t act, it was going to drop all the way back to $1 million.
And Congress did not act by the end of 2012. At the stroke of midnight, while most people were sleeping, or perhaps watching Anderson Cooper count down the end of the year, the increased exclusion expired, and we were back to a $1 million exclusion. Until the following afternoon, when Congress actually met in session on New Year’s Day, and passed a bill which made the $5 million exclusion more or less permanent, added an automatic inflation adjustment, and made it retroactive back to midnight.
So finally we had a permanent tax law, right? No, not really.
For one thing there was the issue of “spousal portability.” Up until 2011, if you wanted to double up the estate tax exclusion for a married couple, you had to do some complicated stuff, usually involving something called an A/B Trust. Those trusts were expensive, tangled and convoluted, and they required that, after the first spouse died, at least some of the assets go into a restricted trust, limiting the ability of a couple to do what they wanted with their own assets. But in 2011, the Congress passed a law allowing for a married couple to hold onto the exclusion amount for the first spouse who died, so that in effect they could double up the exclusion. All they had to do was file an estate tax return after the first spouse died.
But the law was temporary, this time for just two years. So if a couple was over the one person amount, should they go ahead and do the complicated and restrictive A/B Trust, or just hold their breaths and hope the Congress would make the temporary rule permanent? Fortunately, they did make it permanent, so now spousal portability is something we can rely on. But only after two years of uncertainty.
And here is another change: when Donald Trump came into office, they doubled the estate tax exclusion. With the inflation adjustments that were already in the law, the exclusion amount was about $5.5 million. Now it jumped to double that, and in fact for 2023 it will be almost $13 million that is excluded from estate tax. But if the Congress does not act by 2026, the exclusion will drop back to half that.
For most of our Senior Voice readers, none of this makes any difference. As long as you are safely under about $6.5 million in total assets, you don’t need to worry about estate taxes. But for those who do, and those who advise them, this is crazy-making. If we’re coming up on the end of 2025, and my clients are trying to decide whether to give most of their assets to their kids, before the ball drops in Times Square and the exclusion amount drops by half, I am honestly not sure what to tell them.
Maybe I can dust off my old Magic 8 Ball. Its guess is as good as mine.
Kenneth Kirk is an Anchorage estate planning lawyer. Nothing in this article should be taken as legal advice for a specific situation; for specific advice you should consult a professional who can take all the facts into account. And that’s a certainty.