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Potential Reduction in Estate Tax Exemption in 2021 and What We Can Do About it

February 28, 2021 by admin Blog, Estate Planning
Home | Blog | Potential Reduction in Estate Tax Exemption in 2021 and What We Can Do About it

Potential Reduction in Estate Tax Exemption in 2021 and What We Can Do About it

As explained by the Internal Revenue Service (IRS), the estate tax is a tax on your right to transfer property at the time of your death. Only a small number of estates are subject to the estate tax. The estate tax exemption is $11.7 million for an individual is currently for the year 2021. An estate valued at less than that amount is not taxed.

That being said, the estate tax exemption is scheduled to drop in 2025—and it could be going down even early than that. In this article, our San Diego estate planning attorney provides an overview of the current federal law, discusses the possibility for future reductions in the exemption, and explains your options.

Tax Cuts and Jobs Act (TCJA): Estate Tax Exemption Scheduled to Revert in 2025

In December of 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law by President Trump. Among other things, the tax reform bill increased the estate tax exemption. In 2016 and 2017, the individual exemption was $5.45 million and $5.49 million respectively. The TCJA essentially doubled that exemption amount, with annual adjustments for inflation. However, the TCJA includes a ‘sunset’ provision. In 2025, the estate tax exemption is scheduled to revert to the pre-2018 level.

A New Administration Means New Policies—Possible Reduction Coming

It is not clear that the current estate tax exemption level will make it all the way to 2025. As a candidate, President Biden proposed a significant reduction in the estate tax exemption. Recently, CNBC reported that the Biden Administration wants to reduce the individual estate tax exemption to $3.5 million—a threshold even lower than the pre-2018 level. What exactly will happen to the estate tax exemption in 2021 and beyond remains to be seen. Still, it is reasonable to expect that a reduction in the exemption is possible, even likely.

You Can Plan Ahead to Best Protect Your Financial Interests

With the current estate tax exemption set to expire (in 2025 or sooner), you may be wondering if there are steps to take now to protect your financial interests. The answer is ‘yes’—with a proactive approach you can effectively minimize your overall tax burden. Here is the most important thing you should know:

  1. The IRS has issued guidance clarifying that there will be no “clawback” on lifetime gifts made under the current estate tax rules.

In other words, any gifts made under the current estate tax thresholds will not be subject to additional tax in the future, even if the exemption is eventually reduced. This means that it may be in your best interests to start gifting money/assets/property to your beneficiaries now in order to preserve your access to the tax exemption.

Contact Our San Diego, CA Estate Planning Lawyer Today

At The Law Office of Kris Mukherji, our California estate planning attorney has the skills, knowledge, and experience that you can rely on. If you have any questions about estate tax planning and possible future reductions, we are more than ready to help. Contact us at (858) 442-5747 for a fully confidential initial consultation. From our law office in La Jolla, we provide estate planning services in San Diego and throughout the region.