The estate tax in the United States is a federal tax on the transfer of the estate of a person who dies. It is a system that is unified with the gift tax. The 2017 tax act (Public Law 115-97) doubled the exemption amount for the estate tax through the end of 2025. For this reason, estate taxes have primarily been non-issues for estate planning as it only affects 0.2% of the estates (CBO). This has also attracted a lot of estate planners into the field who have only scant familiarity with IRS rules and regulations.
Unless congress extends the historically sky-high tax exemption amount ($12.92 million per individual for 2023), the exemption will be reduced by half in 2026 to what it was before, adjusted for inflation.
While people always say, unless “congress acts,” i.e., repeals the current law and continues the current estate tax amount, don’t be too hopeful. Taxes are unsustainably low in general. Revenue is sorely needed.
How likely is it that the current enormous exemption amounts will endure past 2025?
We simply don’t know for sure. However, it may be interesting to hear what the Congressional Budget Office (CBO) shares on its website. The CBO is a non-partisan federal agency providing Congress with budget and economic information.
“CBO projects that, under current law, estate and gift tax revenues would total $21.6 billion in 2021 and rise to $49.5 billion in 2031.” This latter amount is enough to finance the Departments of Energy or Justice (source).
“Estate tax revenues are projected to increase sharply after 2025, when the exemption amount is scheduled to drop. Over the 2021–2031 period, combined estate and gift tax revenues are projected to total $372 billion.”
Democratic or Republican Congress, the current law will be allowed to sunset. This big chunk of money comes from a segment of the population that is not likely to change political allegiance based on changes in the tax law. In consequence, it’s too much money to pass up.
Graphic: Projected Revenues From Estate and Gift Taxes. Data source: Congressional Budget Office, using the agency’s February 2021 baseline. See www.cbo.gov/publication/57129#data. Amounts are in nominal dollars.
So what does the COB recommend you do?
The COB doesn’t recommend tax-saving strategies to individual taxpayers, but if you read between the lines, you can extract some indirect “recommendations.” See yourself here under “Sources of Uncertainty in CBO’s Revenue Projections”.
If you believe you are getting close to the reduced exemption amount, you should review your estate plan with your trusts and estates attorney. Says the CBO: “For example, some people may set up trusts so that their assets can be transferred to a beneficiary without incurring estate and gift taxes while allowing the donor to receive income from those assets.”
Depending on your situation, making some large gifts may be worthwhile now. The CBO: ”In CBO’s judgment, under current law some people will accelerate their giving of gifts in response to the lowering of the estate tax exemption at the end of 2025.”
If you don’t do estate planning, the government doesn’t mind. The COB says, “People may have varying ideas about future tax legislation and how the law will be applied to their estate. Those factors can affect the degree to which they engage in estate tax planning and other behaviors to minimize their tax liability.”
Good news. The IRS may have to wait a bit longer for your estate tax revenue. The COB: “In addition, wealthy people have lower mortality rates than the overall population; although CBO adjusts for that on the basis of the research literature, those estimates are uncertain.”
What do I recommend you do?
You should discuss your financial situation with an estate planner rather than wait until the last minute. When it comes to crunch time, you may have trouble finding one who still has time to take you on. Plans don’t need to be activated right away, but can be ready for immediate implementation once the situation with a new administration and their tax and budget plans becomes clear.
Related:
What is AB trust planning?
The Future of Wealth Care
