Estate Tax Update – What is Looming on the Horizon?

For more than 100 years, the federal government has imposed estate taxes upon the death of a taxpayer. So that not every estate must pay this tax, the federal government instituted exemptions on applicability of the federal estate tax based on the value of an estate at the time of the taxpayer’s death. If the value of the estate is less than the exemption, then no federal estate tax is due.

In 1916, the federal estate tax exemption was $50,000 per person. In 2021, it is $11,700,000.00 per person. Thus, a married couple may be able to leave a non-taxable inheritance to their beneficiaries of $23,400,000.00, which is certainly a boon for high wealth individuals.

However, the current federal estate tax exemption is due to expire on December 31, 2025, the day it will “sunset”. In 2017, as part of the Tax Cuts and Jobs Act of 2017, the exemption doubled from $5,490,000 to $11,180,000. Currently, the exemption is $11,700,000 and is adjusted every year for inflation.

When the current law sunsets in 2025, it is expected that the exemption will return to $5.49 million, adjusted for inflation and is expected to be approximately $6.0 million person. Thus, a married couple could potentially leave an estate of approximately $12 million free from the imposition of federal estate tax. If the estate’s value is more than the then-current exemption amount, the value above the exemption may be taxed at a maximum of 40% of the value above the exemption.

Recently, laws have been passed to rebuild the United States infrastructure, to create jobs in new fields, and to advance climate control measures. This will result in large amounts of taxpayer money being spent to pay for these projects. It is not clear where the money will come from.

However, during the 2020 Presidential Campaign, President Biden promised to reduce the estate tax exemption from its current amount to $3.5 million. Additionally, his plan calls for the maximum tax rate to increase from 40% to 45%. When the House and Senate were controlled by different parties, it was thought that it was unlikely that such a proposal would make it through both houses of Congress. At present, if proposed, it would be more likely to be passed by both houses.

At the state level, there is some good news – many states do not impose estate taxes or inheritance taxes. However, many states impose one or both of these taxes. Given the increasing amount of home-based work, many people all around the United States are moving or have moved to other states while working for their current employers.

If you are planning a move to another state, make sure to check in with your estate planning attorney. Seventeen states and the District of Columbia have estate and/or inheritance taxes. Many feel that if the Biden plan is passed, many more states may decide to lower their state exemption levels to be the same as the federal exemption or may impose estate and/or inheritance taxes on their citizens, all in an effort to raise additional tax revenue.

If these changes come to pass, you should make sure to consult with an experienced estate planning attorney for estate planning measures to plan for these possible scenarios. The attorneys at Poole Shaffery & Koegle, LLP would be pleased to assist you in establishing or modifying your estate plan to plan for future changes in estate laws.