• Bernhardt Wealth Management

Will the Estate Tax Exclusion Expire? Don’t Wait, Plan Now

It seems hard to believe from our current vantage point that less than twenty-five years ago, only $600,000 was exempted from estate taxes. When a person died, any amount left to heirs above $600,000 would be taxed at the then-maximum tax rate of 55%. Today, the estate tax situation is very different, thanks most recently to the passage in 2017 of the Tax Cuts and Jobs Act (TCJA), which raised the exemption on taxable estates to $11.4 million. On October 26, 2020, the Internal Revenue Service announced that for anyone dying in 2021, the inflation-indexed exemption will be $11.7 million per person, and any unused amount from a deceased spouse can be picked up to be used later by the surviving spouse. In other words, a married couple has a total available exemption from estate taxes of $23.4 million. In addition, the maximum estate tax rate on amounts above that threshold has dropped to 40%.

Obviously, this has made a huge difference for estate planning. Since the late 1990s, in fact, the threshold at which estates had to pay estate taxes has consistently been raised. From the $600,000 level mentioned above, the bar had risen to $5.49 million by 2017, just before the passage of the TCJA. Even at that level, the congressional Joint Committee on Taxation estimated that only about 0.2% of US estates were subject to estate tax. Today, that percentage is even lower.


But this situation is not likely to be permanent. Historically, the estate tax has been levied at many different amounts, ranging from the $50,000 exemption granted in 1916, taxed at 1%, to the $11.7 million amount currently, taxed at 40%. Periodically, the threshold for taxation is changed by new tax laws, along with the taxation percentage, and while the general direction has tended upward, the higher exemption granted by the TCJA was designed, as part of the legislation, to expire in 2025. At that time, the exemption will revert back to the pre-TCJA level of $5 million per individual ($10 million for married couples), indexed annually for inflation. Additionally, President Biden announced, even before his election, his intention to reduce the estate tax exemption amount to $3.5 million. The plan would also increase the top rate for the estate tax to 45%.


Obviously, President Biden’s plan would pull a lot more people into estate tax territory, although it is uncertain that the measure would pass in its current form, and it seems unlikely that it would affect the 2021 tax year. But the prospect of a coming change has set people talking to their financial and legal advisors about adjusting their estate plans to reflect the likely outlines of a lower threshold on the exemption. After all, the government will need to find a way to pay for the massive relief packages already passed in response to the pandemic, as well as the likely future stimulus funding. Wealthy estates could provide a politically attractive source for some of those funds.


As a result, many wealthy individuals are reviewing their gifting and other estate planning strategies in order to reduce the amount of their estates that could be subject to taxation upon their passing. There are other, more sophisticated techniques that can protect large estates from taxation, but these strategies take time to enact. This makes it more important than ever for persons with sizeable and potentially taxable estates to begin now having discussions and making plans with their financial and legal advisors.


If you are wondering how a lower estate tax exemption or a higher marginal estate tax rate could impact your estate planning, we would happy to help you find the answers you need; please contact us. For more background on the ever-changing estate planning landscape, click here to read our article, “Estate Planning Must Be Ongoing.”


Buen Camino!


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