2021 Federal Estate Tax Exemption: Use It or Possibly Lose It
This is the third article in a series of articles covering potential changes in the tax laws and their effect on estate planning. As stated in my prior article, although President Biden’s “American Families Plan” does not currently include proposals to lower the estate, gift, and generation-skipping transfer tax exemptions and to raise the corresponding tax rates, the other prominent bills include reducing the federal estate and GST tax exemption amounts from $11.7 million to $3.5 million, reducing the federal gift tax exemption from $11.7 million to $1 million, and increasing the gift, estate, and GST tax rates. These changes are to be effective as of January 1, 2022, so they would apply to deaths occurring after December 31, 2021, as well as to GST transfers and lifetime gifts made after December 31, 2021. If these changes are adopted, they could have a dramatic transfer tax effect on people with assets in excess of the reduced exemption amounts.
Individuals and married couples who expect to have assets at death in excess of the reduced federal estate tax exemption that would be available to them if the proposed tax changes were adopted ($3.5 million per individual), and who have not already fully used their federal gift/estate and GST exemptions, may wish to act now to take advantage of the existing, and more taxpayer-friendly, tax provisions, exemptions, and rates. For those individuals and married persons, it would be extremely beneficial to use their remaining gift/estate tax exemptions now or risk losing, upon the effective date of enactment of the lower exemptions, the excess exemptions they now have under the current law. For example, if the exemption is decreased from $11.7 million to $3.5 million and the estate tax rate is raised from 40% to 45%, the potential cost of taking no action and losing the full excess exemption is, shockingly, almost $3.7 million.
Before any action is taken, however, consideration should be given, and to the extent possible, planning should be implemented in a manner that protects against the potential risks that the tax changes could be retroactively applied to January 1, 2021.
The next article in this series will cover proposed income tax changes in basis rules and capital gains taxes affecting estate planning.