If the Federal Estate Tax Exemption is Reduced in the Future, Will Your Estate Be Penalized?

HNWElder Law, Estate Planning

death taxes

  • Today the Federal Estate death tax exemption is very high.
  • Only the very wealthy are subject to federal death taxes.
  • The law may change in the future.
  • What can you do today to protect yourself and preserve the high death tax exemption?

Plan To Maximize Your Exemption from Federal and NJ Death Tax

The federal estate and gift tax exemption is $11.4 million per taxpayer. It increases annually until 2026 unless Congress changes the law. For those unfamiliar with gift tax and estate death tax issues please see my Estate planning website which is linked here. For a married couple, the exemption amount is twice that, nearly $22.8 million. Unfortunately this generous tax code provision is cut in half in 2026, unless Congress acts before then to make it permanent.

Planning To Protect Against Changes in the Estate Death Tax

Reductions in the federal estate tax exemption have been proposed in the past but never adopted.  If a reduction were to take place, there has been concern about how that will work. The confusion arises because the federal estate tax is imposed based upon the sum of lifetime gifts plus the assets a decedent owns at death. So what’s the issue you ask? The issue is whether a gift that is protected from the federal gift tax today because of the higher exemption amount will be penalized and taxed in the future if the death tax exemption is reduced.

Let’s take an extreme and simple example. You’re worth $11.4 million. You make a gift of all of your assets this year and owe no federal gift tax because the exemption amount covers it. You survive until 2026, and you then die. Theoretically your federally taxable estate is $11.4 million (This figure is a total of your lifetime gifts).  Say in 2026 the exemption amount falls to roughly $5.5 million. That suggests a federal estate tax of some $2 million dollars could be due, even though your estate will have no assets in it since you gifted them away years before you died.

Fortunately for taxpayers, the IRS has recently proposed new regulations to head off this possibility. Gifts that were free of transfer tax during the period of an enlarged exemption will stay tax-free forever; they won’t be hit by a later estate tax.

The practical impact of this development for individuals who have larger estates is that they should consider making substantial gifts before 2026 so as to “lock in” the benefit of the larger exclusion. The gift also locks in the taxable value of the transfer.

To discuss your NJ Estate Death Tax planning matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.

By Fredrick P. Niemann, Esq., of Hanlon Niemann & Wright, a Freehold Township, Monmouth County NJ Estate Planning Attorney

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