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Current Estate Tax

Current tax law provides an exemption of $11.7 million per person ($23.4 million for a married couple) in 2021 to be passed to beneficiaries without federal estate tax. The federal estate tax rate is currently 40%.

Proposed Changes

President Biden has proposed reducing the exemption to around $6 million and Bernie Sanders recently introduced a bill for the exemption to be $3.5 million. Furthermore, Biden proposed raising the estate tax to 45%.

Estate Taxes Will Rise

Even if estate tax law is not changed, the current exemption will drop beginning in 2026 from a sunset provision in the existing law. The estate tax exemption for 2026 is scheduled to revert back to the 2017 amount of $5.49 million with a cumulative inflation adjustment for 2018-2025. As a ballpark estimate, applying 2% as the annual average inflation rate, the exemption would be about $6.3 million per person. 

Does It Impact You?

If you think the estate tax law proposals won’t pass Congress AND your estate is below $12 million, no additional action is needed from typical estate planning. If your estate is or will be significantly greater by the time your estate is passed to your beneficiaries, it may be worth considering some estate planning techniques for minimizing higher tax rates.

Preserving the Big Exemption
One method is for couples to create an irrevocable trust and contribute assets into the trust up to $23.4 million, preserving the current exemption without estate taxes for beneficiaries. The IRS ruled that they won’t seek to claw back tax on amounts contributed should the exemption subsequently get reduced, provided legislation is not enacted retroactively.

Assets placed in an irrevocable trust are no longer part the estate and no longer owned by or benefit the grantor. The grantor establishes the trust with provisions on how the assets are to be administered on behalf of beneficiaries.

Reducing Your Estate
Another technique is to place an asset that will rise in value, such as pre-IPO stock, into a grantor retained annuity trust (GRAT), which can get the appreciation of the shares (or other property) out of your estate, while you receive most of the value you contributed back from annuity payments the trust pays you over two or more years.

There are other strategies that may be used in addition or instead of these examples, depending on your particular situation. Consulting with a trust and estates attorney is wise and necessary for structuring some of these solutions.

Although keeping enough assets so that you are comfortable is paramount, pending estate tax changes are important considerations for reducing estate taxes as part of your estate plan. Once estate tax law reduces the exemption, it will be too late to capture the current $11.7 million exemption. 

I am working with some of my clients on this issue. If you would like assistance with this or other financial matters, you can reach me at 201-266-6829 and jeff@fintegrity.com.