The estate tax exclusion is the amount you can give without facing an estate tax. Under current law, you may give this amount during life or at your death and after that amount is used, you face a federal tax of 40% on assets beyond that amount. The amount has fluctuated a great deal over the years. It was $675,000 as recently as 2001. In 2021, the exclusion is a whopping $11.7 million per person. This exclusion consists of a “permanent” exclusion of $5 million, adjusted for inflation since a 2011 base year, and then temporaril doubled through 2025 as a result of a 2017 law. So, unless Congress acts to extend the doubled exclusion, it will revert to $5 million adjusted for inflation beginning in 2026. Confusing, isn’t it?
However, Congress could act sooner than 2026 to reduce the exclusion. Congress has tinkered with the estate tax many, many times over the decades. So, this would be nothing new.
Proposals from the Biden campaign indicated a desire to reduce the estate tax exclusion to $3.5 million. Such a proposal would need to pass through the House of Representatives, which Democrats control by a narrow majority of 222 seats to 211 seats held by Republicans, with 2 seats currently vacant. Assuming legislation to reduce the estate tax exclusion were to pass through the House, it would then proceed to the Senate.
At the beginning of January, the Senate consisted of 50 Republicans and 48 Democrats (and independents caucusing with the Democrats) and two seats pending runoff elections in Georgia. Beating long odds, Democrats won both those runoff elections in Georgia, so the Senate is now tied 50-50. This means the Vice President casts the tie-breaking vote in the Senate. Prior to January 20, 2021, Vice President Mike Pence enables Republicans to retain the majority. However, on January 20, 2021, Vice President-Elect Kamala Harris will be sworn in as Vice President and the majority in the Senate will shift to the Democrats.
Thus, beginning January 20, 2021, Democrats will have the narrowest of majorities in the House and Senate. Even with a narrow majority, there are hurdles to passage in the Senate. Senate rules require 60 votes to end debate on most matters. Also, it’s not at all certain every Democrat would agree, as they’re often a fractious caucus.
But, with deficits mounting, Congress may seek to raise revenue from many sources, including reducing the estate tax exclusion. Why wait to see what Congress does? Your best chance of taking advantage of the current unprecedently high exclusion is to use it now.
If you’re married, you could give assets in the amount of your remaining exclusion to a trust for the benefit of your spouse and/or descendants. Your spouse could be the trustee of the trust and would have the ability to use the assets for their support. If you’re unmarried, you could give your assets to a trust for the benefit of your descendants.
January’s political events have altered the political landscape substantially. Consider whether taking advantage of the current estate tax exclusion is right for you. Speak with a qualified Estate Planning attorney about your options.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
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