Recently, the IRS announced that the official estate and gift tax limits for 2021 would be raised. For 2021 the estate and gift tax exemption are $11.7 million per individual, up from $11.58 million in 2020. This means that an individual could leave up to $11.7 million to heirs and pay no federal estate or gift tax. However, the presidential election could also affect your estate plan. It’s important to speak to an estate planner in northern Virginia for advice on which moves you should make and how potential changes could affect your plan.
What the Election Results Mean
As part of President Trump’s signature tax overhaul, a rise in estate and gift tax exemptions was enacted. Trump’s tax overhaul doubled the then $5 million per person base level exemption to $10 million, from 2019 through year-end 2025, with a flat tax rate of 40%.
While republicans have supported making the doubled exemption amount permanent, Joe Biden has proposed restoring the estate and gift taxes to their 2009 level. This would be $3.5 million per person for estate tax and $1 million for the gift tax, with a top rate of 45%. This could have significant consequences to current planning.
[Related: Post-Election Estate Planning]
The IRS announced new inflation adjusted numbers in Rev. Proc. 2020-45. This includes details for the 2021 tax brackets, standard deduction amounts and more. If you are wealthy and worried about the estate and gift tax exemption amounts going down, now is the time to start planning and to take action.
According to the announcement, the annual gift exclusion amount for 2021 stays the same at $15,000. This means you can give away $15,000 to as many of your kids, grandkids, friends, and their spouses as you want with no federal gift tax consequences. Furthermore, a husband and wife can each make $15,000 gifts, doubling the impact. Separately, you can make unlimited direct payments for medical and tuition expenses.
So, how will changes affect your estate planning? Well, with the new 2021 numbers, a couple who has used every dollar of their exemption before the increase has another $240,000 of exemption value to pass on tax-free. For anyone worried about the size of that number, there are spousal lifetime asset trusts (SLATs). Furthermore, there are IRS-tested advanced estate-freeze strategies like grantor-retained annuity trusts (GRATs) and installment sales to grantor trusts. This is when you give away the upside of assets transferred to the trust tax-free.
Factors to Consider
Estate planning is crucial to protecting your wealth and assets. With the changes, it is important to remember that the $23.4 million number per couple ($11.7M per spouse) is not automatic. An unlimited marital deduction allows you to leave all or part of your assets to your surviving spouse free of federal estate tax. However, to use your late spouse’s unused exemption (portability), you must elect it on the estate tax return of the first spouse to die, even when no tax is due. If you don’t know what portability is or how to elect it, you could be hit with an unplanned federal estate tax bill.
Separate Estate/Inheritance Taxes
If you live in the District of Columbia or any of the other 17 states that levy separate estate and or inheritance taxes, there is even more at stake. Sometimes, death taxes start at the first dollar of an estate. Here is a look at how the federal estate tax/gift tax exemption has changed over the years according to the Tax Policy Center.
- 2003: $1 million/ $1 million
- 2008: $2 million/ $1 million
- 2009: $3.5 million/ $1 million
- 2011: $5 million/ $5 million
- 2018: $11.18 million/ $11.18 million
- 2021: $11/7 million/ $11.7 million
Estate Advice in Northern Virginia
If you are concerned about possible changes to your estate tax or gift tax exemption status, it is best to seek the advice from an estate planner in Northern Virginia. Contact Argent Bridge Advisors today to get started!