Susan Rothwell, Partner
February 1, 2021
We’ve made it through the election and a change of administrations. We’re ready for 2021. Big changes to the tax laws may be on the horizon, but, for the moment, estate planning strategies are still governed by the Trump era Tax Cuts and Jobs Act of 2017 (“2017 Act”). The amount that a person can transfer tax free as gifts during life or on death remains at historic highs. Adjusted for inflation under the 2017 Act, the new amounts for 2021 are as follows:
- Federal estate tax exemption amount: $11,700,000
- Generation Skipping Transfer Tax (“GST”) exemption amount: $11,700,000
- Gift tax exemption amount: $11,700,000
- Top estate, GST and gift tax rates: 40%
- Annual gift tax exclusion: $15,000.
This means that a single person can make gifts during life (or transfer at death) up to $11,700,000 without having to pay federal gift or estate taxes. A married couple can transfer twice that amount ($23.4 million). So most Americans will not have to pay gift or estate tax in 2021, absent a change in the law.
The GST tax is an additional tax on top of the estate tax. It applies when a donor makes gifts or leaves at death more than $11,700,000 to grandchildren. (The GST tax also applies when a donor makes gifts of that amount to persons who are 37 ½ years younger.)
The annual gift tax exclusion remains at $15,000, as in 2020. This is the annual amount that an individual can give to another person without having to file a gift tax return. If an amount greater than $15,000 is given, the donor must file a gift tax return, but will not have to pay gift tax unless the donor has previously given away $11,700,000; the IRS tracks a person’s lifetime gifts.
The 2017 Act providing these generous exemptions sunsets on December 31, 2025. Unless changed sooner by Congress, the gift, estate and GST tax exemption amount will then fall back to $5,000,000 (adjusted for inflation).
Will Congress reduce the exemption amount before the end of 2025? Many believe the new Democratic administration will accomplish that, possibly even in 2021. If Congress acts this year, would the change be retroactive to January 1, 2021? Many believe the answer is no: if you make gifts totaling today’s full exemption amount, you would not owe gift tax on the difference between your gifts and any lower exemption amount Congress might later enact into law. No one knows, of course, but if you agree with this line of thinking, and can afford to do so, it is still a good time to make gifts (using the full amount of your available exemption) to family or loved ones.
There is also talk about ending the step-up in basis to fair market value for assets that you own at death. The step-up has given enormous benefits to heirs of low basis assets; the heirs escape capital gains taxes the decedent would have paid if he or she had sold the assets during life. If Congress eliminates the step-up, wealthy individuals would have to re-examine traditional estate planning strategies.
Most observers believe changes are likely to gift, estate, and GST tax laws. It may be desirable to begin to think about the impact on your current planning. It’s also a good time to ensure that your estate planning documents (will, revocable trust, health care proxy and power of attorney) are up to date and effectively carry out your wishes.
If we can assist you in strategizing about the future, reviewing prior documents or creating new ones, please contact us.
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