Estate Tax Law and Strategy Changes are Coming

At Avidian, we hear from our clients frequently about the pending tax law changes. If you have followed my articles over the years, you know that I often write about taxes and their impact on your estate, retirement, and overall financial planning – several of the articles are referenced at the end of this piece.

Currently, many tax changes are being considered that will change the estate and gift tax exemption amounts (the amount you can exclude from estate taxes at your death or during lifetime gifting), the tax rate, and the possibility of the government legislatively ending many of the strategies we have used for decades (that have been approved by the IRS and/or through tax court cases). For more information on these specific issues, I have discussed many of these changes in previous articles listed at the bottom of this article.

For those with complex estates, especially those with complex family issues or large individual assets like closely held businesses, the time to consider possible action to avoid additional estate taxation is now. We are meeting with clients regularly to discuss estate planning and gifting strategies, whether to take advantage of low tax rates by selling assets (even businesses) before the rates go up. For those with larger estates or those in the highest income tax brackets, it is critical to review these alternatives now vs. waiting and scrambling later this year when the laws may be passed.

In this article, I briefly discuss the recent changes in estate tax law over my career (I started in the 1990s) to show you that these changes have been dramatic and subject to frequent change. However, we are at the highest estate tax exemption levels in history (as you can see below), and you may want to take advantage of these estate tax planning opportunities now before some go away – for some time or for your lifetime.

Current Status of Estate Taxes

Estate taxes have affected fewer and fewer people over time. According to the Tax Policy Center, only 1,900 of an estimated 4,100 estates were expected to be taxable in 2020. This was less than 0.1% of the estimated 2.7 million people expected to die that year. The percentage is so low because the federal government offers a generous estate tax exemption.¹

The exemption allows estates under a specific value to pass property to heirs tax-free. This threshold for when the tax kicks in has increased consistently since 1997, while the estate tax rate has decreased or held steady (see table below).

How the Exemption Works

The gross value of your estate must exceed the exemption amount for the year of your death before estate taxes will come due. Even then, only the value over the exemption threshold is taxable.

The 2021 exemption is $11.7 million, up from $11.6 million in 2020. Therefore, the first $11.7 million of your estate is exempt from taxation (double that if you are married). Your estate wouldn’t be subject to the federal estate tax if it’s worth $11.7 million or less, and you died in 2020. The IRS announced in October 2020 that the estate tax exemption will increase to $11.7 million for the tax year 2021. The exemption is indexed for inflation, so it tends to increase somewhat annually, even when tax legislation doesn’t affect it. The estate tax rate is 40%, but this is lower than the 45% applied in 2009. The estate tax remains a very progressive tax because only the wealthiest households pay it. The current law that changed via the Tax Cuts and Jobs Act of 2017 will sunset at the end of 2025.

The Exemption Is Portable

The government also allows your estate to transfer any unused portion of your exemption to your spouse if you’re married. This provision is referred to as “portability.”

For example, you would have $5.7 million of your exemption “leftover” in 2021 if your estate was worth $6 million and with the exemption set at $11.7 million. You could effectively give this portion of the exemption to your spouse, increasing their exemption by that amount when they die. This eliminated the earlier need to have “Bypass Trusts” to preserve the exemption.

Presumably, your spouse will inherit most, if not all, of your $6 million in property, so this allows them to pass that property to heirs tax-free at the time of their own death. The estate is also entitled to an exemption in the year your spouse dies, and your unused exemption is added to that amount.

Your estate must file an estate tax return to let the Internal Revenue Service know that you’re making this transfer, even though no taxes are due.

History of Estate Tax Laws

Early in my career, during George W. Bush’s presidency, the landmark Taxpayer Relief Act of 1997 called for a gradual increase in the estate exemption from $600,000 in 1997 to $1 million by 2006. This set the stage for greater increases in years to come.

Estate taxes from 2010 through 2012 were based on the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act that was signed into law by President Obama on December 17, 2010, but the law was only good for two years. It was supposed to expire, on December 31, 2012, so the federal estate tax exemption and rate would default to the previous number that was in effect.

Unexpectedly (by most estate tax professionals), this didn’t happen. Congress passed the American Taxpayer Relief Act (ATRA) on January 1, 2013, and President Obama signed it into law on January 2, 2013. ATRA was intended to make “permanent” changes to the laws governing federal estate taxes, gift taxes, and generation-skipping transfer taxes. Note that permanent in tax law is never permanent.

Fast forward to President Trump, who signed the Tax Cuts and Jobs Act (TCJA) in December 2017. The exemption was only $5.49 million in 2017. The TCJA more than doubled that to $11.18 in 2018.

Here’s how the estate tax has broken down over the years:

At Avidian, we believe estate and income tax changes are coming. These changes are expected to be dramatic but maybe not “permanent.” Now is a great time to meet with your income and estate planning team to determine any action you should take. If you snooze, you may lose!

Also, please check out these other tax and policy related articles on our website:

1. 10 Most Asked Tax Questions so Far in 2021
2. 2021 Discussion of Tax and Estate Tax Changes – Barron’s Live
3. American Rescue Plan
4. 2021 Income Tax Update – Alert
5. Key Estate and Income Tax Planning Takeaways from the “Blue Wave” Democratic Victories
6. Year-End Tax Planning Checklist – 2020
7. Secure Act (and the loss of the Lifetime Stretch IRA and Changes in RMDs)
8. Qualified Opportunity Zone (Investment Considerations and Tax Benefits)
9. Review of Real Estate 1031 Exchanges
10. Tax Cuts and Jobs Act (good to know and review if any “repeal”)

• For Individuals
• For Business Owners

Article Sources: 1 How the Federal Estate Tax Exemption Changed from 1997 to Today at thebalance.com

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