Estate planning and wealth transfer experts are looking skyward as the future of the federal inheritance tax becomes increasingly uncertain.
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The federal gift and estate tax exemption is the amount of wealth an individual can transfer, either during his or her lifetime by gift or after his or her death from his or her estate, without incurring federal estate and gift taxes.
If an individual transfers more than the exemption amount, the excess is subject to a gift or inheritance tax, currently 40%, payable to the IRS. This note focuses on federal gift and inheritance taxes and the applicable exemption amount. However, it is important to remember that many states, such as Rhode Island, Massachusetts, and Maine, have their own state exemptions and inheritance taxes that must be paid in addition to federal inheritance taxes.
The golden hour
The Tax Cuts and Jobs Act (TCJA) of 2017 doubled the federal exemption for gift and estate taxes from $5.6 million per person to $11.18 million per person. Thanks to the TCJA and its annual inflation adjustments, the federal exemption in 2024 will be $13.61 million for individuals and $27.22 million for married couples.
This remarkable increase in federal exemptions has pushed federal inheritance taxes out of sight and out of mind for the average person, leaving only the option of state inheritance taxes. In fact, individuals living in states without state inheritance taxes (such as New Hampshire and Florida) with assets below the federal exemption have had the peace of mind of not having to pay either state or federal inheritance taxes!
When the sun goes down …
Unfortunately, the TCJA has an expiration date. Unless Congress decides to extend it or make it permanent, the federal gift and estate tax exemption will “phase out” on December 31, 2025, to pre-TCJA levels (adjusted for inflation), capping at about $6 million to $7 million for individuals and about $13 million for married couples. Although Kenny Chesney and Uncle Kracker tell us that everything gets hotter when the sun goes down, this TCJA party could well get cold without a second wind from Congress.
An uncertain forecast
The looming expiration of the TCJA has sparked a flood of debate and proposals that could dramatically change the estate tax framework and impact all levels of wealth.
One example is the American Housing and Economic Mobility Act of 2024, introduced by Massachusetts Senator Elizabeth Warren. This proposal aims to reduce housing costs and create new housing by providing half a trillion dollars in federal funding.
A major source of these federal funds would be to reform the estate tax system by raising inheritance taxes and increasing the burden of the estate tax. The proposal, if implemented, would lower the exemption amount for gifts and inheritances to $3.5 million, meaning a person could gift that amount during their lifetime or transfer it after their death without incurring federal estate tax. A 55% transfer tax would be imposed on all assets over $3.5 million, but not more than $13 million.
If the assets exceed $13 million but do not exceed $93 million, the transfer tax is $7.15 million. Plus 60% of the amount exceeding USD 13 million.
If the assets exceed $93 million, the transfer tax is $55.15 million. Plus65% of the $93 million surplus. In addition, the proposal would limit the use and effectiveness of gifts and other estate planning mechanisms, exposing more assets to inheritance and estate transfer taxes, leaving fewer assets for future generations.
With the “sunset” on the horizon and the election around the corner, proposals like the American Housing and Economic Mobility Act of 2024 will continue to emerge. During this time of uncertainty, all wealthy people should reacquaint themselves with the federal estate tax, as it will emerge from the clouds one way or another.
The best thing to do is to stay informed and contact your estate planning attorney sooner rather than later to (a) understand how estate tax changes may impact your wealth transfer goals and (b) take advantage of current federal gift and inheritance tax exemptions and preemptive estate tax planning.
