Change is on the horizon! The current individual federal estate tax exemption is set to revert to $5,000,000 (adjusted for inflation) on December 31st, 2025 from its current level of $11,580,000. This was set to happen even without the recent change in Washington unless Congress acts before that deadline to extend the current law.
To give you a little history and perspective, the federal estate tax exemption was only $600,000 when Marty and Tamara graduated from law school in 1991. That exemption amount affected a large percentage of the population. Over the next 20 years, the exemption would increase almost 10-fold to approximately $5,000,000. In 2018, it doubled again and took a huge jump to $11,180,000 with a 2025 sunset provision. 2020 now finds us in the midst of a world pandemic with a Democratic administration taking office and the need for new federal tax revenue because of the pandemic-related relief legislation.
The real question now is whether the federal estate tax exemption will be allowed to naturally sunset in 2025 or whether it will change before that time. Prior to the election there was a real concern that a surge of voters supporting Democratic candidates (the blue wave) could dramatically and quickly change the estate planning landscape. That did not happen. There was fear (panic among some) that the federal exemption amount would be reduced significantly and be made retroactively effective on January 1, 2021.
Our sources tell us that it is unlikely that we will see any major change to the estate tax laws in 2021. The new administration will initially focus on controlling the COVID pandemic and restoring economic stability to the country. Another factor is whether the Senate will continue to be controlled by Republicans. Experts in the estate planning community seem to believe that it is possible we could see a change in the federal exemption amount (and possible other estate tax law changes) become effective in 2022. However, it may be more likely that any change may not occur until after the results of the 2022 mid-term elections are sorted out!
No one has a crystal ball. That is why our Estate Planners for Life™ clients have chosen to maintain their estate plans over time. They know that estate planning involves complex decisions and requires a methodical approach. Some of the gifting strategies and irrevocable trusts used to reduce taxes by wealthier taxpayers leave the taxpayer with “post-election” and “post-transfer” remorse. We saw this after the election in 2012 when some people around the country acted hastily based upon projections of what might happen with the law and when it did not change were upset when their irrevocable estate tax reducing strategies couldn’t be undone! It is always better to choose a course of action based upon your income, your income needs, the type of assets that you own, your comfort level of losing control of your assets, and your gifting objectives based partially on the maturity and responsibility of your beneficiaries. Stay tuned!
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