If you are single and your estate exceeds $6,030,000 or you are a married couple and your combined estate exceeds $12,000,000 this affects you.
This article contains a high-level overview of the House Committee Proposal that impacts the estate and gift tax exemption. Keep your eye out for my upcoming blog on the proposed impacts on Irrevocable Life insurance Trusts and Family Limited Partnerships.
Democrats in Congress are negotiating the Build Back Better bill and hope to pass the legislation via the reconciliation process, relying solely on the votes of the fifty Democratic senators. The effort to get all fifty Democratic senators on board continues and the outcome is unclear. What is clear, however, is that if something passes, it will likely contain numerous tax increases that will primarily impact high-net-worth individuals. The best evidence of what those changes might be is the tax law proposal released by the House Ways and Means Committee on September 13, 2021 (The Proposal).
The Proposal reduces the current $11,700,000 per person unified gift and estate tax exemption by approximately one half to approximately $6,030,000.
The Proposal, if enacted, will take effect January 1, 2022. The unified exemption would continue to be indexed to inflation and increase annually. Importantly, the portability of an individual’s unified exemption to a surviving spouse is unchanged. Therefore, married couples may still combine their exemptions. Moreover, the Proposal leaves untouched the adjusted income tax basis at death. (This is commonly referred to as the “step up”; however, downward adjustments do result in the event of depreciated assets.)
What it means
Individuals with assets approaching the reduced $6,030,000 individual shelter and married couples with assets approaching $12,120,000 should consider reevaluating their estate plans to determine if additional steps should be taken.
These individuals and couples may want to lock in the current $11,700,000 unified Gift and Estate exemption by gifting away assets to use the full amount of the exemption. There are numerous considerations in planning for such a gift—not least being whether the individual actually wants to (or can) give away the entire current exemption amount. The types of assets to give away and the method of doing so should be closely examined. The loss of a step up in income tax basis at death for the gifted assets would also be a factor. This would all need to be considered, planned for, and enacted prior to January 1, 2022—and for now, that planning would be based only on the House Committee Proposal, not a bill signed into law. That said, the following are examples of the potential savings in utilizing this strategy.
Example $25M Estate -> Tax savings of $2,268,000
Assume an individual has assets valued at $25 million and has made no previous taxable gifts. If the person does nothing and dies in 2022 the value of his/her/their estate in excess of the $6,030,000 unified Gift and Estate exemption is subject to the 40% Estate Tax, resulting in a total gross estate tax of $7,588,000. If, on the other hand, a person takes advantage of the current $11,700,000 unified Gift and Estate exemption in 2021 by giving away that amount in 2021 (ex. to an irrevocable trust for the benefit of children), and then dies in 2022 with a remaining estate of $13,300,000, the total gross estate tax incurred would be $5,320,000 ($25M – $11,700,000 = $13,300,000 multiplied by the 40% Estate Tax = $5,320,000). This results in a savings of $2,268,000.
Example $13M Estate -> Tax savings of $2,268,000
Assume an individual has assets valued at $13,000,000 and has made no previous taxable gifts. If the person does nothing and dies in 2022 the value of his/her/their estate in excess of the $6,030,000 unified Gift and Estate exemption is $6,970,000 and is subject to the 40% Estate Tax, resulting in a total gross estate tax of $2,788,000. If, on the other hand, a person takes advantage of the current $11,700,000 unified Gift and Estate exemption in 2021 by giving away that amount in 2021 (ex. to an irrevocable trust for the benefit of children), and then dies in 2022 with a remaining estate of $1,300,000, the total gross estate tax incurred would be $520,000 ($1,300,000 multiplied by the 40% Estate Tax = $520,000). This still results in a savings of $2,268,000!
In Sum
If you are single and your estate exceeds $6,030,000 or you are a married couple and your estate exceeds $12,000,000, you should have your estate evaluated to be ready to pull the trigger on any advisable action prior to the effective date if this bill passes. This is particularly important for very elderly or ill clients.