During the tenure of Donald Trump in 2017, this Tax was enacted. Estate planning attorneys warned their wealthy clients the approximately $11 million lifetime federal estate tax exemption was not going to last forever. It was and still is scheduled to drop back down to $5 million in 2026.
After the 2020 presidential election, estate planning attorneys were burdened with clients wanting to make large gifts, mostly through the use of irrevocable trusts. The gifting mania has gone on through 2021 as people have raised concern that the $11 million exemption would drop sooner than 2026, looking at the pandemic-induced cost of the government.
Whether you are a US citizen or an NRI living in the US for decades, you need to know everything about the estate tax.
The federal gift tax or estate tax is one in which gift-givers, not gift recipients, are required to pay. You are not eligible to pay the tax until you have given away more than $11 million in cash or other assets during your lifetime. In simple words, the federal gift tax is a tax on your right to transfer property at your demise.
If you possess estates valued at over $11.7 million in 2021 (or $11.58 if they died in 2020) then you are liable to pay the tax. This is counted per person. For instance, you and your spouse could potentially have $23.4 million in assets (or $23.16 million for a death in 2020) before you are subject to any federal estate tax.
Additionally, 18 states and the District of Columbia also imposed estate or inheritance taxes, according to the Tax Foundation.
How it Works
As the tax is based on the value of an estate, take the date-of-death value of most assets like cash, real estate, insurance, securities, etc. to calculate the amount of tax owed and then subtract certain deductions. You can deduct mortgages and related debts, and property that passes to a surviving spouse or qualified charity. Then add to the value of lifetime taxable gifts and subtract the credit, which is currently $11.7 million.
The federal gift tax ranges from 18% to a top rate of 40%. With this, you can pay a higher rate per dollar as the estate size increases.
As per a proposal by the House Ways and Means Committee dated September 13, 2021, amendments in taxes will give the legislature a framework to work with. If this proposal is passed, many changes would impact longstanding estate planning strategies. Below are the proposed things to be included in the estate Tax Exemption:
- The current $11,700,000 federal estate tax exemption amount is likely to drop to $5 million (adjusted for inflation) by January 1, 2022. And the exemption amount would be around $6,020,000 in 2022.
- The tax rate would remain at 40%. There’s no change to the federal estate tax rate.
- Irrevocable life insurance trusts (ILIT) that holds life insurance would also be affected by the proposed legislation. The life insurance proceeds of ILIT, funded after the date of enactment, would be taxed for estate tax purposes after your (the client) death.
Gifts to ILIT’s were signed before the date of enactment but funded post-enactment would see a prorated portion of the insurance proceeds taxed after your death. Hence, you must consider pre-funding the existing ILIT with sufficient assets to pay the premiums to avoid a trench of your insurance proceeds being taxed on your demise.
- The proposal does not include an elimination in the step-up in basis at death
- When you gift interests (e.g., limited liability companies) within the family, you may avail a discount on the valuation for lack of control or lack of marketability. If the proposal gets approved, it would omit the availability of valuation discounts for family members that hold nonbusiness assets such as cash, equity and certain types of real estate as of the effective date of the enactment.
