Just three years ago, the federal Tax Cut and Jobs Act provided new opportunities for tax savings in estate planning through substantial federal estate and gift tax changes. That legislation more than doubled the lifetime transfer tax exemption and increased the annual gift tax gift exclusion amount.
Under the 2018 law, the inflation-adjusted lifetime transfer tax exemption is $11.7 million for an individual and $23.4 million for a married couple in 2021. The transfer exemption is a unified tax credit that includes both estate and gift taxes. In addition, the annual gift tax exclusion to each person or organization is $15,000, with no limit on the number of gifts.
The 2018 legislation provided that the lifetime exemption would revert to pre-2018 levels if Congress fails to extend the effective date (or otherwise act) before January 1, 2026. Now, pending legislation in the Senate proposes to substantially decrease the transfer tax exemption and limit the gift tax exclusion as early as January 1, 2022. If the pending changes are approved by both houses of Congress and the President, the new law will significantly impact estate and gift tax planning for many individuals and married couples.
Under a Senate Bill introduced by U.S. Senator Bernie Sanders, called the “For the 99.5 Percent Act,” the lifetime estate tax exemption would drop to $3.5 million (from the current $11.7 million level) for an individual and $7 million (from the current $23.4 million level) for a married couple, beginning in 2022. The bill also significantly increases the federal estate tax rate for estates that exceed the exemption amount, with progressive tax rate increases for larger estates. At the same time, the bill adds a $1 million lifetime limit to the gift tax exclusion and imposes other limitations on the annual gift tax exemption. As currently written, these changes would take effect at the beginning of the first calendar year following enactment.
The proposed legislation is complex and extremely detailed. There are exceptions to the new rules. Other pending bills seek to make further changes in various tax law provisions, including modification or elimination of the stepped-up basis rules that apply to inherited assets. Additional proposed tax law changes are also anticipated. If the changes currently under consideration become law, the impact on estate and gift tax planning could be extraordinary.
The proposed changes are still early in the legislative process. The Senate Bill was introduced at the end of March. A House Bill has not yet been introduced. However, once legislation is enacted — regardless of the provisions — some of the new rules may be immediately effective. Others are currently proposed to take effect on January 1, 2022. The effective dates could change during the legislative process.
While the possibility still exists that some changes could be retroactive to January 2, 2021, steps taken before enactment are likely to be grandfathered in from an estate and gift tax perspective. However, the window of time to act before significant changes occur is quite limited.
In light of the potential changes, some individuals and married couples may wish to complete planned gifting immediately to maximize gifts under the current lifetime exemption before a new law takes effect. Even if the lifetime exemption is reduced, gifts that are completed before a change in the rules are not likely to be invalidated under a new lower exemption.
Depending on your financial circumstances, the proposed changes may impact your planning in other ways as well. To fully assess the impact on your situation, consulting with a knowledgeable estate planning lawyer is essential.
The only way to learn how potential tax law changes may affect your estate plan and gifting plan is to talk with an experienced estate planning attorney. Our BRMM lawyers continue to monitor legislative developments and are fully prepared to assist you in assessing the impact of the pending legislation. We welcome the opportunity to review your estate and gifting plans and suggest opportunities that may be available before new laws take effect.
Located in Troy, Michigan, BRMM helps clients in the Tri-County area and throughout Michigan. Our attorneys have served Michigan clients since the 1970s. Call us at (248) 494-4577 or complete our online form to set up a free initial consultation.