Although the $11.7 million lifetime federal estate tax exemption is still on track to decrease to $5.49 million on January 1, 2026, those affected are becoming increasingly worried that it will not only happen much sooner than 2026 but also be further reduced.
Trust Activity Still Increasing
The gift and estate tax exemptions typically enable wealth to be passed on from one generation to the next tax-free. In 2020 and 20201, the legal industry has seen a dramatic increase in clients concerned their wealth may surpass any future unified tax credit, employing the use of additional estate planning strategies to lock in the $11.7 million exemption. One such strategy is using irrevocable trusts, which when properly structured, can enable wealthy clients to make large gifts without relinquishing control of their assets, and avoid additional estate and gift taxes.
House Ways and Means Committee Proposes Major Changes
While Congress can vote to make the $11.7 million exception permanent, the Biden administration has pledged to drastically decrease the Unified Credit for Estate taxes from $11.7 million to $3.5 million, and the credit for gift taxes to $1 million.
On September 13, 2021, the House Ways and Means Committee announced a proposal to modify tax law. Although the proposed modifications do not currently include the federal estate tax rate or elimination in the step-up in basis at death, they do include numerous changes that would potentially affect estate planning strategies including:
- Effective January 1, 2022, the $11,700,000 current federal estate tax exemption amount would drop to $5 million (adjusted for inflation)
- Assets held in a revocable trust that is created on or after the legislation is enacted will be included in the tax exemption, upon the individual’s death, effectively preventing the trust from fulfilling its primary intention
- Proceeds from irrevocable life insurance trusts signed and funded on or after the legislation is enacted, would be subject to estate taxes upon the individual’s death.
- Gifts to irrevocable life insurance trust signed before the legislation is enacted and funded after would be subject to estate taxes on a prorated portion of the insurance proceeds upon the individual’s death.
Next Steps
Individuals who are concerned their wealth may surpass any future unified tax credit should consider additional estate planning strategies to lock in the $11.7 million exemption. In addition, clients considering new gifting trusts are encouraged to create and fund them prior to the date of the new proposed legislation enactment.