Sunset and Cloudy Skies on Horizon for Federal Estate Taxation
Estate planning and wealth transfer professionals have their eyes on the sky as the future of federal estate taxation grows increasingly nebulous.
Background
The federal gift and estate tax exemption is the amount of assets that an individual can transfer out of their estate, either during their lifetime by gifting or upon their death, free of federal estate and gift taxes.
If an individual transfers more than the exemption amount, the excess incurs what is currently a 40% gift or estate tax payable to the IRS. This alert will focus on the federal gift and estate taxes and applicable exemption amount, but it is vital to remember that many states, such as Rhode Island, Massachusetts, and Maine, have their own state-level exemptions and estate taxes that must be paid in addition to any federal estate taxes.
The Golden Hour
The Tax Cuts and Jobs Act (TCJA) of 2017 doubled the federal gift and estate tax exemption, from $5.6 million per individual to $11.18 million per individual. Thanks to TCJA and its annual inflationary adjustments, the 2024 federal exemption is $13.61 million for individuals and $27.22 million for married couples.
This remarkable increase in the federal exemption has kept federal estate taxes out of sight and out of mind for the average person, leaving only the possibility of state estate taxes. In fact, individuals who reside in states with no state estate tax, (i.e. New Hampshire and Florida) with assets under the federal threshold, have had the peace of mind of zero state estate tax liability and zero federal estate tax liability!
When the Sun Goes Down…
Unfortunately, the TCJA has an expiration date. Without congressional action to extend or make it permanent, the federal gift and estate tax exemption will “sunset” on December 31, 2025 to pre-TCJA levels (adjusted for inflation), landing somewhere around $6 million to $7 million for an individual and around $13 million for a married couple. Although Kenny Chesney and Uncle Kracker tell us that everything gets hotter when the sun goes down, this TCJA party may very well go cold without a second wind from Congress.
An Uncertain Forecast
The looming “sunset” of the TCJA has prompted a flurry of discourse and proposals that could drastically change the estate tax framework and impact all levels of wealth.
One example is the American Housing and Economic Mobility Act of 2024 that was introduced by Massachusetts Senator Elizabeth Warren. This proposal is designed to lower housing costs and create new housing through the generation of a half-trillion dollars in federal funding.
A major source of that federal funding would be the overhaul of the estate tax system through heightened estate taxes and increased estate tax exposure. The proposal, if enacted, would reduce the federal gift and estate tax exemption to $3.5 million, which means that an individual could gift during life or transfer at death that sum free of federal estate tax. A transfer tax of 55% would be imposed on any assets in excess of $3.5 million but not more than $13 million.
If the assets exceed $13 million but are not more than $93 million, the transfer tax would be a base tax of $7.15 million plus 60% of the excess over $13 million.
Finally, if the assets exceed $93 million, the transfer tax would be a base tax of $55.15 million plus 65% of the excess over $93 million. In addition, the proposal would restrict the use and efficacy of gifting and other estate planning mechanisms to expose more assets to estate tax and generation-skipping transfer tax, thereby leaving fewer assets for future generations.
With the “sunset” on the horizon and the election around the corner, proposals such as the American Housing and Economic Mobility Act of 2024 will continue to surface. During this time of uncertainty, those at any level of wealth should get reacquainted with the federal estate tax, as it will emerge from the clouds in one way or another.
The best course of action is to stay informed and communicate with your estate planning attorney sooner rather than later to (a) understand how estate tax changes could affect your wealth transfer goals, and (b) take advantage of the current federal gift and estate tax exemption and any preemptive estate tax planning.
For questions on the federal estate tax exemptions, or for any estate planning issues or concerns, please contact firm Trust & Estates attorneys Larry Hunt or Vivian Karian.