Last edition we
looked at and focused on the many changes in the tax law affecting mostly
individual and business taxpayer matters. We did not talk at all about certain
changes brought about by the American Taxpayer Relief Act of 2012 as well
as Public Law 115-97, known as the "Tax Cuts and Jobs Act",
which became law on December 22, 2017 affecting gift and estate taxes at the
federal level.
I am attuned to
these estate planning tax rules as they are a part of our class on estate planning.
Recently many calls have been coming to our office as many of our clients are
not really grasping the real AND SUBSTANTIAL impact of the recent changes in
the tax law about gift and estate taxes.
Maybe by looking
at the past history of this type of tax and by studying a detailed graph, we
can shed some better light to our readers on this massive change affecting
estate.
Background and
History of Gift and Estate Taxes in Our Country
I am not going to
give a complete detailed history of estate and gift taxes at the federal level
in this short writing. Suffice it to say that we as citizens of the United
States have traditionally been taxed on our gifts both during our life and the
value of our estate at our death when such aggregated values exceed a certain
dollar threshold.
A graph is worth
a thousand words and I thank the underwriters at Stewart Title for compiling
the graph below for which I give them credit and I humbly reprint here for your
reference.
If you review it
closely you will see that thresholds in years gone by were as low as
$650,000.00 for an individual estate and that would affect many (if not most)
of our readers. It was increased to $1,000,000 for a couple years, but still
affected many. It gradually increased from there. Let’s look to see what
happened recently. If you look closely, you will see that the threshold has
really been raised to $11,200,00.00 for an individual basically eliminating
estate taxes for about 98% of the citizens in the country.
Summary of
Federal Estate Tax Exclusions and Maximum Rates over the Years
(Courtesy of Stewart Title)
The following is
a summary of Federal estate tax basic exclusions and maximum rates per
person:
Tax Year
|
Estate Tax
Basic Exclusion
|
Maximum Estate
Tax Rate
|
1997
|
$600,000
|
55%
|
1998
|
$625,000
|
55%
|
1999
|
$650,000
|
55%
|
2000
|
$675,000
|
55%
|
2001
|
$675,000
|
55%
|
2002
|
$1,000,000
|
50%
|
2003
|
$1,000,000
|
49%
|
2004
|
$1,500,000
|
48%
|
2005
|
$1,500,000
|
47%
|
2006
|
$2,000,000
|
46%
|
2007
|
$2,000,000
|
45%
|
2008
|
$2,000,000
|
45%
|
2009
|
$3,500,000
|
45%
|
2010
|
$5,000,000 or
Zero *
|
35% or
Zero *
|
2011
|
$5,000,000
|
35%
|
2012
|
$5,120,000
|
35%
|
2013
|
$5,250,000
|
40%
|
2014
|
$5,340,000
|
40%
|
2015
|
$5,430,000
|
40%
|
2016
|
$5,450,000
|
40%
|
2017
|
$5,490,000
|
40%
|
2018
|
$11,200,000 **
|
40%
|
* The 2010 Tax Act gave estates of
decedents dying in 2010 the option to choose between the revived estate
tax and the prior (EGTRRA) tax law. These estates have the option to elect
either: (1) the new estate tax, based upon the new 35% maximum rate and the $5
million exclusion, with a stepped-up basis for property in the estate, or (2)
no estate tax, and the required application of modified carryover basis
rules under EGTRRA.
** Prior to the
enactment of the Tax Cuts and Jobs Act, this amount had been
scheduled to increase to $5,600,000 in 2018.
The Tax Cuts and
Jobs Act increased the basic exclusion amount in the case of estates of
decedents dying after December 31, 2017, and before January 1, 2026, by
substituting '$10,000,000' for '$5,000,000' in the law. The $10,000,000 amount
is indexed for inflation after 2011.
Spousal
Portability
The 2010 Tax Act
provided for the "portability" of the Federal estate tax exclusion
between spouses. Portability permits spouses to aggregate each spouse's Federal
estate tax exclusion.
A surviving
spouse may elect to add the unused portion of a deceased spouse's estate tax
exclusion (the "Deceased Spousal Unused Exclusion") to the surviving
spouse's estate tax exclusion, thereby providing the surviving spouse's estate
with a larger applicable exclusion amount.
Portability is
available only to estates of decedents where both spouses died after December
31, 2010, and only if an election is made on a timely filed estate tax return
of the predeceased spouse. Under the 2010 Tax Act, the portability provision
was set to expire on December 31, 2012.
The more recently
passed American Taxpayer Relief Act made spousal portability of the Deceased
Spousal Unused Exclusion permanent.
The Tax Cuts and
Jobs Act just passed and law today did not modify the Spousal Portability
rules. Therefore, in 2018, the combined potential exclusion amount per couple
is $22,400,000. This is exciting.
State of
Washington Death Tax [Washington does not have a Gift Tax]
Prior to January
1, 2005, a credit was allowed against the Federal estate tax for any state
death, estate or inheritance taxes paid to any state or the District of
Columbia.
Beginning on
January 1, 2005, EGTRRA replaced the state death tax credit with a deduction
for death taxes paid to any state or the District of
Columbia. The deduction was set to expire on December 31,
2010. The 2010 Tax Act extended the deduction for actual state estate
taxes paid until December 31, 2012.
The more recently
passed American Taxpayer Relief Act made the deduction for state estate taxes
permanent.
Keep in mind that
although the thresholds are much higher at the Federal level, the threshold at
the State of Washington level is currently slightly over $2,000,000.00 and is
adjusted yearly for inflation. The actual amount for 2018 is $2,129,000.00 as
adjusted for inflation.
Implications for
Federal Estate Tax Returns
Due to the
increased Federal exclusion amount, fewer estates will be subject to Federal
estate tax and a potentially larger number of estates will not be required to
file a Federal estate tax return: Form 706: United States Estate (and
Generation-Skipping Transfer) Tax Return.
However, any
estate valued at more than the basic exclusion amount for the year of
death must file a Federal estate tax return even if no Federal estate tax
will be owed after applicable exclusions and deductions are applied. Any
estate applying to make use of a Deceased Spousal Unused Exclusion must also
file an estate tax return.
There are always
risks inherent in real estate transactions. To guard against these risks, real
estate purchase and sale agreements typically include contingencies, including
an important inspection contingency.
Additionally,
when dealing with newly constructed property, a buyer will generally expect that
all work would be done in a workmanlike manner. However, as illustrated in the
case below, the devil is in the details, and Buyers should always be aware
of the specific terms of the Purchase and Sale Agreement and Buyers should always
seek to take advantage of inspection contingencies.
In Schumacher
v. T. Garrett Construction, Inc., 199 Wn. App. (2017), Division Two (in
Tacoma) of Washington’s Court of Appeals was faced with a post-closing dispute
arising from a Real Estate Purchase and Sale Agreement of a newly
constructed property.
FACTS OF THE
DISPUTE BETWEEN BUYER AND SELLER
*****In that
case, the Buyers and Sellers entered into a Purchase and Sale Agreement for a
property which was then under construction.
*****The Purchase
and Sale Agreement included an inspection addendum and an addendum in which the
buyer’s requested certain builder specifications.
*****During the
transaction, the Buyer and Seller communicated regularly and met informally at
the property several times to discuss the scope of the project.
*****Additionally
before closing, the Buyer and Seller had a formal walk-through in which the
Buyer made certain requests of the Seller to make repairs to which the Seller
responded to those requests and made repairs that satisfied the Buyer prior to
the date of closing.
*****However, at
no point did the Buyer have the property inspected by a third-party home
inspector even though such was provided as an inspection contingency within the
Purchase and Sale Agreement.
*****At closing,
the Buyer complained to the Seller about issues with the property including
issues with the kitchen cabinets and trim, and the exterior stone veneer of the
garage which the Seller had installed before closing. However, the transaction was
closed without these repairs being made.
*****After
closing, the Buyers continued to complain to the Seller about many alleged
defects with the property. The Seller offered to repair kitchen cabinetry, trim
problems, and replace the stone on the exterior garage wall, but the Buyers’
reject this offer.
*****The Buyers
filed a lawsuit against the Seller for breach of contract, breach of the
implied warranties of habitability and fitness for a specific purpose, breach
of limited warranty, and consumer protection act violations.
RULING AT THE
TRIAL COURT LEVEL
At the trial
court level, the Buyers prevailed on their breach of contract claim and obtain
a judgment against the Seller for $9,772.50 NOT including attorney fees and
costs!!!
The trial court
based its damages award on the defective stone on the garage exterior ($5,500
plus $522.50 in sales tax), defective cabinets and trim in the kitchen ($350),
and Seller's failure to build a cedar fence ($3,400).
The trial court
found that the Buyers were the substantially prevailing party and awarded
attorney fees and costs totaling $13,021.31.
The Seller being
upset appealed.
RULING FROM THE
COURT OF APPEALS
The Court of Appeals
reversed the trial court.
The Court of
Appeals held the trial court erred in awarding the Sellers damages for the
improper installation of the garage stone and kitchen because recovery for the
installation of these items was not recoverable under the Purchase and Sale
Agreement and because there were no warranties or guarantees in the Purchase
and Sale contract.
Further, the
Court of Appeals held that the trial court erred in awarding the Seller’s
damages for the cedar fence because the Purchase and Sale Agreement never
referenced the fence and that, although the fence was advertised in a flyer,
the flyer was never properly incorporated into the Parties’ Purchase and Sale
Agreement.
Additionally, the
Court of Appeals held the trial court erred in awarding the Buyer their
attorney fees and costs.
To make matters
worse for the Buyers, the Court of Appeals remanded the case back to the trial
court to enter an award of attorney’s fees and costs in favor of the Seller at
the trial court level and the Court of Appeals awarded the Seller its
attorney’s fees and costs on appeal.
In making its
ruling, the Court of Appeals noted that although new construction includes the
implied warranty of habitability, this guarantees that a foundation supporting a
house is firm and secure and that a house is structurally safe. However, this
warranty does not apply to defects in workmanship absent a specific contractual
term.
PRACTICE POINTER: The practice pointer here is to always make
sure a client reviews (and understands) the terms of a Purchase and Sale
Agreement before going under contract.
Further, when
dealing with new construction, exercise caution in assuming there are
warranties outside of the contract itself.
Additionally,
although a buyer may be happy with informal inspections and may be looking to
save money, if problems arise, not taking advantage of a formal third-party
home inspection may limit a buyer’s rights to recovery after closing. When it
comes to inspections, error on the side of caution.
PRACTICE POINTER: Many consumers are convinced that there
exists a warranty in new construction. There are warranties all over the place.
each appliance has a warranty. Many of the products used in the construction
may have a warranty. However, there is no specific workmanship warranty in
Washington UNLESS the contractor specifically provides one.
PRACTICE POINTER: We always encourage our client buyers to
have a third-party licensed home inspection ESPECIALLY in new construction. I
must talk long and hard as I get all kinds of resistance. However, these
inspections have found a whole host of defects and repairs required even in new
construction. Building Inspectors from the country or city miss a lot folks.
Inspection dollars spent in new construction purchases will pay off handsomely
in the long run especially as buyers understand their limited ability to
recover against a builder after closing.