Predicting possible changes in tax laws is probably as difficult as predicting how many inches of snow we are going to get this winter. But it is still a good idea to keep an eye on the weather reports. As Bob Dylan wrote: “You don’t need a weather man to know which way the wind blows.” This is a “long winded” way of saying that it looks like increases in federal estate and gift taxes are in the medium to long range forecast.
Beginning in 2018, the individual exemption against Federal estate and gift taxes was increased dramatically. Today, each person has an exemption of $11.7 million that can be applied against lifetime gifts or exempt from estate tax the transfer of assets to their heirs following death. Each person is entitled to the exemption. As a result, a married couple can use both exemptions and shield up to $23.4 million, if they take the proper steps.
The tax rate on assets that exceed the exemption amount is generally 40%. However, for the vast majority of people, the 40% federal estate and gift tax has effectively been eliminated by the large exemptions.
The 2020 election results may be causing a lot of people to take a second look at their estate plan and to reconsider whether they can continue to ignore the federal estate and gift tax. It is impossible to predict whether Congress will reduce the exemption. However, a number of proposals have been made, and President Biden has suggested that he would like to reduce the gift tax exemption amount to $1.0 million and the estate tax exemption to $3.5 million.
As this develops over the coming year, many of our clients with larger estates should consider reviewing their existing estate plans in anticipation of the possible changes. It is possible that any changes to the federal estate and gift tax law would be effective on a retroactive basis to the beginning of 2021. Again, it is difficult to predict and this issue would need to be carefully explored before any action was taken.
There are possible ways to reduce the tax consequences if gifts are made during 2021 and the gift tax exemption is reduced retroactively to January 1, 2021. Some planning possibilities exist for individuals with estates that may exceed the amount of any reduced exemption amount. For example, Individuals with large estates may want to consider gifting substantial assets to their heirs this year before the introduction of legislation that would reduce the amount of the gift tax exclusion. And there are methods to build some flexibility into your plans.
In addition, some individuals may want to consider establishing a trust which would provide for payments to their spouse for a period of time, with the remainder of the assets in the trust going to their heirs following their death. The goal of an arrangement of this type would be to take advantage of the current large gift tax exemption and avoid estate tax on the assets that have been transferred to the trust. There are obviously risks that would need to be carefully explored.
This is a very difficult time to intelligently plan for possible changes in the federal estate and gift tax laws. However, ignoring the possible changes could have costly consequences that may have been avoided. It is advisable to consult an estate planning attorney to answer your questions and discuss if and when the possible tax changes may affect you before the storm rolls up from Washington, D.C and snows us in.