Take Advantage of the Historically High Estate Tax Exemption

By Michael Ingram

When the Tax Cuts and Jobs Act (TCJA) was enacted in 2017, many financial advisors cautioned their high-net-worth clients that the law’s significant tax benefits wouldn’t last forever. “Time is ticking,” we said. “If you’re planning to gift millions of dollars to your family members and favorite charities while you’re alive, now is the time to get it done.”

Several of the TCJA’s provisions, which took effect in 2018, were designed to sunset at the end of 2025—including the significantly higher lifetime federal gift and estate tax exemption. (In 2018, that amount was $11.18 million for individuals.  With proper planning, it is now approximately $11.7 million for individuals and $23.4 million for married couples)

Unless Congress steps in to keep the higher exemption in place, it will expire and revert to the old amount, or about half as much. (Approximately $6 million in 2025, after adjusting for inflation). The window is small and is quickly closing.

Though it’s unclear when Congress might act, there are strong indications that the exemption could be reduced sooner than expected—as soon as 2022—and possibly by a larger amount.

During his campaign, President Biden proposed lowering the $11.7 million exemption to $3.5 million per individual and increasing the estate tax rate from 40% to 45% on amounts exceeding the exemption. The Biden team also signaled at that time that it might seek the elimination of the step-up in basis of an asset upon inheritance.

We’ve already seen a slew of tax hikes proposed in the House that—if passed—would affect wealthy individuals and families. Higher-income taxpayers would be wise to prepare for tax increases in general, and for changes to gift and estate taxes specifically.

Planning for 2021 and Beyond

It’s important to be clear on a couple of points here:

  • This is far from a done deal. The House Ways and Means Committee released a proposal in September that provides a framework for tax changes, including reducing the estate tax exemption. But the details will continue to evolve as Democrats work to craft and pass a final bill. Further negotiations are expected, and, of course, it will have to reconcile with the Senate’s version. It wouldn’t be surprising to see some sort of reduction take effect on Jan.1, 2022, instead of Jan. 1, 2026. Or Congress might simply decide to let the exemption sunset and return to its pre-TCJA amount as planned.
  • Your gifting strategy should be built around your own objectives and timetable. The potential for estate tax savings should never be the only consideration when making gifting decisions. Individuals who have stretched themselves thin with their generosity—perhaps parting with assets too soon—sometimes experience what advisors refer to as “gifter’s remorse.” If gifting now might jeopardize your future financial security, proceed with caution.

Still, if you’ve used most but not all of your exemption, or you planned to get it done but never did, consider this an added incentive to get moving. If the lifetime gift and estate tax exemption does go down from $11.7 million to $3.5 million in 2022, or even $6 million, the cost of delaying could be millions of dollars that would have gone to the people you care about.

If this is a concern for you, it’s to your advantage to use as much of the exemption as possible as soon as you can.

Prepare Now for Coming Changes

Hopefully, the details of any future tax law changes will become more defined in the coming weeks, which should make planning outcomes more certain. You can be sure the Octavia team will continue to closely monitor activities in Congress and elsewhere, and we’ll provide updates as they occur.

In the meantime, if you and your family have questions, your Octavia wealth advisor can discuss how various scenarios might affect your gifting and estate planning goals. It’s always a good idea to review your plan annually to be sure it’s still relevant based on your financial situation and any changes in the tax laws. Schedule some time with us today.

Please see Important Disclosures.