The word ‘unprecedented’ is used routinely now. 2020 and the beginning of 2021 has not been business as usual in just about every respect. However, there is one constant that we can depend on; change. For 2021, the Democratic party now has the White House, as well as the Senate and the House in Congress. With that we can certainly expect there to be tax policy changes in the near future.
Federal Estate Tax and Gift Tax
As I write this article, the Federal Estate Tax exemption and lifetime gifting exemption are $11,700,000 per person. We should all anticipate that this exemption amount will be adjusted downward moving forward. It is believed that President Elect Biden may like to see this exemption lowered to 2009 levels; being, $3,500,000 per person. We do not know what the exemption will end up being; but we know it will most likely be lowered.
The way the Federal Estate Tax and Gift Tax works is that the exemptions are linked. Upon your death, the IRS requires that your Gross Estate value be calculated. This is pretty much everything you own, control or have beneficial use of. Your Gross Estate value will also include any gifts you made during your lifetime that required the filing of an IRS Form 709 (gifts in excess of the annual gifting exclusion; currently $15,000 per person). If your Gross Estate value exceeds your Federal Estate Tax exemption (or in this example, also known as your Unified Credit), then your estate will pay a heavy effective rate on the amount in excess of your exemption (currently 40%; however, 45% in 2009).
For years, US taxpayers have been extremely cavalier about the high exemptions we have enjoyed; believing that this little holiday would never end. Now the reckoning is coming.
What Can Be Done Immediately?
If you have a high net-worth estate (for our purposes, we will safely consider that any estate with a gross value of $7,000,000 or more for a couple; or $3,500,000 for an individual); then you should speak with your estate planning attorney immediately to see if it makes sense to enter into transactions that can lock in your current $11,700,000 exemption so when the exemption is reduced, your estate is protected.
What Should Be Done long-term?
Everyone should review and update their estate plan as necessary to make certain that they will be able to capture the maximum Federal Estate Tax exemption allowed under federal law. In addition, you can consider augmenting your estate plan with strategic planned gifting, charitable planning of all sorts, and specific real estate trusts and/or life insurance trusts in order to mitigate the impact of the changing tax environment.
Contact your JGB Attorney today if you would like to schedule a document review appointment.