Preservation | Family Wealth Protection & Planning

Given the increasing national debt due to 2020’s numerous challenges and a looming election that could potentially see a change in control of Congress and the White House, many believe these exemptions may be reduced before 2026. The problem with a wait-and-see approach is the possibility that any new federal tax law passed later in 2021 could be enacted retroactively to Jan. 1, 2021.

Although Democratic presidential nominee Joe Biden has not announced specific plans for estate/gift or GST tax reform if he is elected, he has referred to returning the estate tax to 2009 levels. In 2009, the estate and GST exemptions were each $3.5 million, the gift exemption was $1 million, and there was a 45 percent tax rate. If the estate tax exemption is reduced from $11.58 million to $3.5 million, then that difference (based on a 45 percent tax rate) will cause an additional $3.6 million of tax. In other words, if you use all of your current exemption through gifting before it is reduced to $3.5 million, then your heirs could inherit an additional $3.6 million (or $7.2 million if you are married) as a result of your planning.

It is anyone’s guess as to whether the estate/gift or GST tax exemptions will be reduced, what the new exemptions might be, and whether the change will be retroactive. The important point is that there is a chance your ability to take advantage of the current exemptions may expire soon (many think on the last day of the year).

If you have a taxable estate (currently over $11.58 million for an individual or $23.16 million for a married couple), then making a gift to utilize your exemption is likely a good tax decision, even if the exemption is not reduced at the end of the year. However, this decision is more complex for families who may need access to the gifted assets in the future. If you to decide to use some portion of your remaining exemption, keep in mind the benefits of utilizing discounted assets and a “grantor trust” to save further taxes.  

The older you are, the more it makes sense to use your remaining exemption now. Younger clients will likely live to see the estate tax laws change many more times, lessening the urgency of any planning.

Whether you initiate end-of-year planning may come down to how important it is to save additional taxes for your children and how likely you think it is Congress will pass a retroactive law decreasing the estate tax exemption.