A year-end estate & gift tax self-check is prudent for everyone, even if you’re not currently exposed to the federal estate tax.

People with taxable estates below the current unified federal estate and gift tax exemption level may need to make changes to reflect the current tax regime. Plus, you should also consider whether changes are needed for nontax reasons. Families and individuals with estates above the unified federal estate and gift tax exemption should consider some options to lower their exposure to federal estate and gift taxes, including:

Make Annual gifts. The current annual federal gift tax exclusion is $15,000. Annual gifts help reduce the taxable value of your estate without reducing your unified federal estate and gift tax exemption.

College tuition or medical expense payments. You can pay unlimited amounts of college tuition and medical expenses (but not room-and-board expenses) without reducing your unified federal estate and gift tax exemption. However, you must make the payments directly to the college or medical service provider.

Consider gifts of appreciating assets. In 2020, you can give away up to $11.58 million worth of appreciating assets, such as stocks and real estate, without triggering federal gift tax (assuming you have never tapped into your unified federal estate and gift tax exemption in prior years). If you’re married, your spouse is entitled to a separate exemption.

Post-Election Estate/Gift Planning

Estate planning is especially important this year because today’s generous federal estate tax regime may not last.  President-Elect Joe Biden has indicated that he would like to unwind the generous federal estate and gift tax provisions of the Tax Cuts and Jobs Act (TJCA) to pay for various spending measures.

If Congress follows Biden’s plan, the pre-TCJA exemptions would likely fall to an inflation-adjusted $5 million, or $10 million for married couples (that’s about half of what the current law allows). That change could go into effect as soon as 2021 or 2022, but it’s not likely to be retroactive to 2020. It’s also possible that the exemptions could fall below the pre-TCJA levels.

Biden has also indicated a preference to eliminate the basis step-up for inherited assets. Under current law, the federal income tax basis of an inherited capital-gain asset is stepped up fair market value as of the decedent’s date of death. So, if heirs sell inherited capital-gain assets, they owe federal capital gains tax only on the post-death appreciation, if any.

This provision can be a huge tax-saver for an inherited asset that has appreciated significantly over the years — such as stock shares that were acquired many years ago for a small amount and are now worth millions. Biden plans to encourage Congress to eliminate this tax-saving provision.

Remember, Congress enacts federal tax law changes. As you are aware, control of the Senate will be determined by a pair of Georgia runoff elections in January. Regardless of the outcome of those runoffs, the likely political makeup of Congress will be split nearly 50/50 between Republicans and Democrats. The odds of major changes to the federal estate and gift tax regime for 2021 are probably low but be aware of the possibility of changes starting in 2022.

After that, who knows? Making large tax-free gifts before law changes take effect is one way to recognize and potentially disarm this threat. Presumably, that will help insulate you against any later reduction in the unified federal estate and gift tax exemption.

Please contact us if we can help with any year-end estate/gifting strategies.   Best wishes for the holiday season!