Wealthier individuals often carefully watch any changes to the federal estate and gift tax exemptions. By an “exemption,” I am referring to an amount that is shielded from estate and gift tax liabilities. As the exemption amounts are adjusted from time to time, corresponding adjustments in tax planning strategies may be needed to reduce estate tax liabilities. In 2020, the federal gift and estate tax exemption is $11.58 million. That means that an individual can distribute up to $11.58 million dollars to her heirs upon her death – including any lifetime taxable gifts – without incurring any federal estate tax liability. For a married couple, that amount is doubled to $23.16 million. The IRS includes any lifetime gifts that either spouse has made above the annual exclusion amount (discussed below) and requiring the filing of a federal gift tax return in this total.
For 2021, the Internal Revenue Service has announced a slight increase in the federal estate tax exemption amount. The new amount will be $11.7 million per individual, or $23.4 million for a married couple.
Although this increase will not impact the vast majority of Americans, one aspect of federal estate and gift tax planning that can hit closer to home is the annual exclusion related to gift tax. Specifically, the annual exclusion is the amount that an individual can gift to another person on an annual basis without needing to file a federal gift tax return. In 2021, the annual exclusion related to gift tax will remain the same as it has been in 2020 – $15,000. So, if a parent wants to gift to her three adult children, she can give each of them $15,000 per year without having to file a gift tax return. Similarly, a married couple can give each of their three children $30,000 per year without having to file a gift tax return. For individuals without federally taxable estates, typically no gift tax is owed upon filing the gift tax return. However, as discussed above, the total amount of lifetime taxable gifts (i.e., gifts above the annual exclusion amount) are included in the calculation of whether an individual’s estate is subject to federal estate tax upon their death.
Will President-Elect Biden propose changes to these amounts? Probably. Unquestionably, the current federal estate and gift tax exemption amounts are quite high, allowing many wealthy individuals to distribute assets both during their lifetime and upon their death with no federal estate tax consequences. As Forbes explains, Biden has previously proposed both lowering the federal estate tax exemption amounts and also eliminating the step-up in basis allowing heirs to receive a tax basis for inherited assets equal to the full fair market value tax basis upon death. The extent to which the estate tax exemption amount would be lowered is unclear. These changes could create significant estate tax liabilities, as well as income tax consequences for heirs if the step up in basis is eliminated. However, looking at the issue from another perspective, Biden’s proposed changes could also generate needed tax revenue at a time when our federal deficit has exploded, millions of Americans have been out of work for months (lowering the tax base), and there is a dire need for federal financial assistance to keep the economy going, due to the COVID-19 pandemic.
Stay tuned, to see how these potential changes unfold!
This post is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with an attorney.