by Anna Kavanaugh | Shareholder, Estate Planning
Following the election of President Biden and with national Democrats holding a (slim) majority in both houses of Congress, speculation and rumors grew that Democratic lawmakers would seize this opportunity to raise estate taxes. Sure enough, the Fall of 2021 brought word that the Build Back Better Act could include concerning changes which would significantly impact the estates of affluent American families. Specifically, these proposals included a reduction of the federal estate tax exemption (the amount of assets a person can pass to his or her heirs free of estate tax) to $3,500,000 per person, the elimination of the income tax basis step-up at death, and dramatic changes to the taxation of grantor trusts. After a nail-biting few months, however, these proposals were dropped from the proposed legislation without comment or fanfare, and the Build Back Better Act stalled in the Senate. As the 2022 midterm elections approach, it is less and less likely that Congress will act to pass any major legislation before November.
As things currently stand, each U.S. citizen and permanent resident has a $10,000,000 exemption from estate taxes. For a married couple, this amount is doubled. The exemption is indexed for inflation each year, and in 2022 the exemption is $12,060,000 per person. Further, each year a person can give $16,000 to any other person (or a married couple can give $32,000) tax free, without touching his or estate tax exemption. However, effective January 1, 2026, under current law the estate tax exemption will be reduced to $5,000,000 per person, or $10,000,000 for a married couple, subject to an increase for inflation.
What does this mean for our clients? The bottom line is that the estate tax exemption is scheduled to be cut in half as of January 1, 2026, even if President Biden’s more concerning proposals do not resurface. Clients whose estates may be subject to estate tax under the projected 2026 exemption levels should consult with their legal and tax counsel to review their current estate plans and evaluate possible strategies for preserving their wealth and planning for future generations.