With the advent of the Tax Cuts and Jobs Act of 2017, the estate, gift, and generation skipping tax exemptions increased dramatically, but these changes were only temporary. With the Biden administration now in place and at least some Democratic control of the senate, there is added uncertainty that should be evaluated soon. It is important that taxpayers with estates exceeding $3.5 Million (per person), review their estate planning now to avoid the chaos we saw last fall.
As of 2021, the exemption stands at $11,700,000 (per person) and is expected to increase each year based upon the U.S. Bureau of Labor Statistics’ Consumer Price Index. The exemption is unlimited on bequests to a surviving spouse.
Under current law, the estate tax on a net taxable estate of $11,700,000 will be zero. Net taxable estate refers to the value of the estate on the decedent’s date of death, after expenses of administration and deductions, and bequests to a surviving spouse.
If a decedent were to die in 2021, with an estate of $11,700,000 there would be zero tax due on the estate and a full step up in tax basis on all assets to the value on the decedent’s date of death.
Under the current tax law, the higher estate and gift tax exemption will “Sunset” on December 31, 2025. Starting January 1, 2026, the exemption will return to $5.49 million adjusted for inflation. With inflation, this may land somewhere around $6 million.
If a decedent dies in 2026, with an estate of $11,700,000, the exemption amount would be approximately $6,000,000, creating a TAXABLE estate of $5,700,000 and an estate tax in the amount of $2,280,000.
Biden Tax Proposal
There may be a new wrinkle if the current Administration were able to pass tax legislation prior to the Sunset provision. President Biden’s plans were laid out for all to see during his campaign last year. But the consensus was that the President would not be able to implement much of his agenda because Republicans in the Senate were going to block most of his tax proposals. But now that Democrats control both the House and the Senate for at least the next two years, Biden’s tax plans have taken on new life.
If this occurs, and his plans to reduce the exemption to $3,500,000 with an increased maximum tax rate of 45% are passed, it could add an additional $1,410,000 in Estate Tax assessments, meaning $3,690,000 would be due nine months after the date of death on an estate of $11,700,000 and it could be effective long before the December 31, 2025 Sunset date.
More importantly, smaller taxable estates of over $3,500,000 may then be subject to estate tax. A taxable estate of $6,000,000 would carry no estate tax even after the Sunset date under the current law, but if the law is changed to include Biden’s campaign proposals, that $6,000,000 estate could be subject to approximately $1,125,000 in estate taxes.
An estate of $11,700,000 per person ($23,400,000 per couple) would result in no tax under current law (before 2026). That same estate would result in a taxable estate of about $5,700,000 (per person) in 2026 resulting in tax of $2,280,000. And finally, that same estate would result in a taxable estate of $8,200,000, resulting in tax of $3,690,000.
Waiting to evaluate your estate until something changes could be a very expensive decision. Please contact us today if you would like our help developing a game plan for each scenario.
» Download Estate Tax – Current Law, 2026, Biden Tax Proposal
About the Author
Douglas A. Venturelli, Esq.
Tax, Estate & Trust, Gift and Probate, Sports & Entertainment
Douglas A. Venturelli, Esq., is a Principal at KROST. He has over 35 years of experience in Tax, Estate, and Business Services. His main focus is consulting with Entertainment, legal, Real Estate, and medical industry clients as well as managing many fiduciary and estate tax issues. » Full Bio
IT WILL BE PART OF THE INFRASTRUCTURE RECONCILIATION BILL? WHAT ARE THE CHANCES IT WILL BE RETRO ACTIVE TO JAN 1,2021?
The estate tax provisions are part of the proposed Infrastructure Bill proposed by Bernie Sanders but this is all subject to negotiations. The Bill has not passed and the provisions not fully negotiated. As to the retroactivity that is a matter of conjecture, but historically, retroactive tax provisions are rare.
What happens if an individual has used say, $11M of his or her lifetime exemption already?
Wouldn’t this cause individuals to “gift” away assets in excess of $5M up to $11.7M before the end of the year while they can?
Thank you for your comment/question. The answer is absolutely not. If an individual has used $11 Million of his or her lifetime exemption already, he or she only has $700,000 in additional gifts they can make before they have to pay the gift tax. If they gift additional assets in excess of $700,000, they will have to write a check of an amount equal to 40% of the cumulative gifts amount in excess of $11,700,000. Using your example, if they gifted $11,000,000 and then gifted an additional amount of, say, another $1,700,000, they will have to pay tax of 40% of $1,000,000 or $400,000. And there would be NO step up in basis on the assets gifted, so the recipient of the gift may also have to pay capital gains taxes on the sale of the gifted assets. Hope that answers your question.
How will the proposed Biden plan treat the pre-2022 lifetime exemption? For instance, if an individual has $10 million and has never done any gifting, can he gift $5 million in 2021, and then if he dies after the Biden plan is in effect, are we dealing only with the remaining amount ($5 million) in his estate or will the plan work like it currently works by considering both the lifetime exemption and the current estate exemption?
No. This is a wrinkle in the gifting rules and the source of much confusion. The exclusion applies to both Gift AND estate taxes. If you gift $5,000,000 in 2021 and the Biden act passes, thus reducing the exemption, you have lost the exemption on the remaining portion of the $10,000,000 estate.
To fully exempt the estate, you would have to gift the full $10,000,000 in 2021. Any gift of an amount equal to the projected Biden exemption, or lower, would provide NO estate tax relief. In fact, you may actually INCREASE taxes since there is no step-up in basis on gifted assets, thus creating potential capital gain taxes on disposition.
Here is an example
TOTAL EXCLUSION UNDER BIDEN ACT……………….$5,000,000
LESS VALUE OF LIFETIME GIFTS………………………….$5,000,000
EXCLUSION AVAILABLE……………………………………… zero
DATE OF DEATH VALUE OF ESTATE……………………$5,000,000
TAX DUE @40%…………………….$2,000,000
If a person has a $8,500,000. estate and gives $5,000,000. away in 2021 won’t the remaining $3,500,000 be within the proposed estate tax deduction to escape estate tax if the gift giver dies in 2022? Or does the government ignore the gift in 2021 and include that in the estate in 2022?
You are correct that the $5,000,000 gift will be given full credit and, assuming there is no tax law change, the remaining amount will be free of estate tax with a 2022 death. However, If the donor dies in 2026, the remaining $3,500,000 would be subject to estate taxes. You should carefully review the $5,000,000 gift since it will not save any estate taxes and may actually create an income tax problem for your heirs.