What Are You Telling Your Clients about Coming Changes in the Estate Tax Exemption?

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Many of us can remember 1997, when the estate tax exemption was $600,000 and the maximum estate tax rate was 55%. Since then, of course, a lot has changed. Today, under the provisions of the 2017 Tax Cuts and Jobs Act (TCJA), estates with a value of up to $11.7 million are exempted from paying taxes on the transfer of wealth to the next generation, and the top rate has dropped to 40%. With the unlimited marital deduction, a surviving spouse in 2021 can accumulate an estate of as much as $23.4 million. For these reasons, The Tax Policy Center calculates that a mere 0.1% of the 2.7 million Americans expected to die in 2020 will have paid any estate taxes at all.

But as we know, change is on the horizon, in one way or another. The current exclusion limits are scheduled to expire in 2025, according to the terms of the TCJA, unless renewed by Congress. Further, if control of the House and Senate doesn’t change from its current constitution, such an extension is unlikely. In fact, if President Biden advances his announced tax program before the midterm elections, the House and Senate, both narrowly controlled by his party, will likely do everything possible to get the package passed and signed into law.

Another strike against the extension comes from the looming “payment due” notices that will be generated by the $4 trillion in stimulus spending passed by Congress and signed into law during the past 12 months. With all that debt to service, squeezing additional taxes from multimillion-dollar estates is more attractive to federal budgeteers than extending the current, relatively high exemption. And, according to the terms of the TCJA, if the extension is allowed to expire in 2025, the exclusion reverts to what it was prior to passage of the 2017 law: $5 million.

Those matters are on the minds of our HNW clients, and they are looking to us for guidance and recommendations. What are we telling them?