Sunsetting Tax Exemption: $11.58M Estate Tax Exemption Could Decrease to $3M on Jan, 1, 2021

“When I first started practicing tax law in 2000, the federal estate tax exemption was $675,000,” said Josh England, LLM, Esq., AAFCPAs’ Consulting Tax Attorney.  “Today that exemption is $11,580,000.”

The federal estate tax exemption is the amount you may give away during your lifetime and own at your death without subjecting it to a 40% estate tax. In other words, any assets you own at your death in excess of the current estate tax exemption will be subject to a 40% tax on its fair market value.

Politics plays a significant role in the estate tax exemption. Under current law, the estate tax exemption, $11,580,000, is scheduled to decrease to $6,000,000 as of December 31, 2025. The Biden tax plan calls for reducing the federal estate tax exemption to $3,000,000.  AAFCPAs reminds clients that changes to the estate tax exemption can be done retroactively; i.e. next year, Congress could pass a bill making the federal estate tax exemption $3,000,000, effective January 1, 2021.

What this means is that we could experience an $8,580,000 reduction in the exemption.  Putting that in terms of actual dollars, if you were to die on January 2, 2021, with an estate of $11.58 million, your estate will pay $3.4 million more in taxes than would be due if you had died on December 31, 2020.

AAFCPAs advises clients to act now, as appropriate, to preserve these opportunities.

Gifting Strategies

Many clients are concerned about gifting strategies because they do not necessarily want to relinquish control of their assets. AAFCPAs advises clients on the many strategies and techniques available that allow clients to continue to control and access their assets even after making “completed” gifts.

The Spousal Lifetime Access Trust (SLAT) allows a married couple to make gifts to each other such that they each still have control over one-half of the assets, yet remove a significant portion of their estates from the estate tax. For couples with estates over $3 million but under the current $11.58 million exemption, AAFCPAs may advise a similar technique whereby one spouse makes a gift of all the assets to a trust for the second spouse.  This technique uses the first spouse’s estate tax exemption but preserves the second spouse’s exemption for future use.

The Intentionally Defective Grantor Trust (IDGT) is a technique where we can make a tax-free sale of assets in exchange for a note.  The sale moves assets with the potential for appreciation out of your estate, while leaving a note that will only go down in value in your estate.

The SLAT and IDGT are two examples of strategies that allow clients to use their current $11.58 million exemption while maintaining control and access to assets.  These strategies may be executed now, and we can wait until next October 15th, the extended deadline to file personal tax returns, to decide whether you want to use the estate tax exemption or undue the gift.

If you have questions about gifting strategies or tax planning, please contact Joshua England, JD, LLM at 774.512.4109, jengland@nullaafcpa.com; or your AAFCPAs Wealth Advisor.

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