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Federal Estate Tax May Be Coming for You and Here’s What to Do

In December of 2017, then-President Trump signed the Tax Cuts and Jobs Act which increased the federal estate tax (FET) exemption from $5.49 million to $11.18 million for an individual. In 2019 this number rose to $11.4 million and in 2020 it rose again to $11.58 million. In 2021, the FET exemption for an individual sits at $11.7 million but that could soon change.

While campaigning for the presidency, then-candidate Joe Biden expressed support for returning the FET exemption to the 2009 level of $3.5 million for individuals and on Thursday, March 25, Senator Bernie Sanders introduced the For the 99.5% Act which brings the matter to the table. While Sen. Sander’s bill does not in itself mean that the FET exemption is sure to drop, it does suggest that things are moving in this direction. What is even more troubling is even if President Biden does not act to reduce the exemption, the current limits will expire in 2025 and will then return to the pre-2018 level of $5.49 million.

Many will read this and think that be it $3.5 million, $5.49 million or $11.7 million, they need not worry because they will never have that kind of money. The FET exemption does not just look at the cash you have in the bank, though; it also looks at the value of your home, your qualified accounts and your life insurance. When all of this is taken into account, $3.5 million does not look like quite so big of a number.

How to Protect Your Estate from a Lower FET Exemption

Until the Biden Administration presents a tax plan, any action individuals may take is based purely on speculation. This said, there are certain issues you want to keep an eye on. The most pressing is whether President Biden’s tax plan will be retroactive to January 2021. While an evenly divided Senate means the likelihood of this is low, it is nonetheless a concern high net worth individuals should discuss with an experienced estate planning attorney. After all, a retroactive change would affect not only affect the FET, but the gift tax exemption, too (which could be lowered from its current value of $3.5 million to $1 million).

At present, individuals of all wealth classes should also take the time to survey their assets and calculate their net worth. Not only will doing so help you determine the extent to which President Biden’s tax reform may affect you, it will also assist in arranging other crucial aspects of your estate plan, including inheritances and long-term care planning.

Lastly, married couples will be relieved to learn that the concept of portability means that both the FET and gift tax exemptions are doubled in their case. While this does imply greater margins, it does not mean couples should be any less prepared to respond with agility to any changes that may arrive.

In the present, uncertain climate, all individuals, whether married or single, should prioritize a flexible approach to estate planning. Changes are coming, after all, even if nobody yet knows when or in what form.

To ensure that you are prepared or to simply learn more about the subject, to not hesitate to reach out to the Law Firm of Blanche D. Smith either by calling (936) 301-0111 or using the contact form on our website.

Monique Hineline

Smith & Smith are very professional, informative, and relatable with examples and stories to ease the estate planning process. I had the best time at their lunch and learn. Even if you already have your estate planning in place I highly recommend attending a lunch and learn. Thanks Smith & Smith!