Partisan politics can create uncertainty in a number of areas that affect our daily lives, including gift and estate tax planning. The Tax Cut and Jobs Act of 2017, effective January 1, 2018, had a drastic impact on gift and estate tax planning. In 2017, the federal government taxed any individual with combined lifetime gifts and net worth at death greater than $5.49 million. Any amount over that would have been taxed at a flat 40% tax rate. The Tax Cut and Jobs Act kept the flat tax rate at 40%, but it increased the gift and estate tax exemption from $5.6 million per person ($11.2 million per couple) in 2017, to $11.18 million per person ($22.36 million per couple) in 2018. The 2020 gift and estate tax exemption, adjusted for inflation, is currently $11.58 million per person ($23.16 million per couple).
The increase to the gift and estate tax exemption also brought a sudden change in how people prepared their estate plans. With a $22.8 million exemption per couple, many people no longer have to worry about being subject to a federal gift and estate tax. Instead of worrying about gifting or funding trusts traditionally used for gift and estate tax planning, surviving spouses now focus on preserving a deceased spouse’s unused exemption to use after the surviving spouse’s death. Ensuring the next generation gets a step-up in basis for capital gains tax purposes is another example.
The current political climate creates a cloud of uncertainty for anyone trying to maximize the use of their gift and estate tax exemptions, especially when it looks as though the exemption itself may become a moving target. Congress passed the Tax Cut and Jobs Act mostly along party lines. Not a single Democrat voted for the Act in either the House or Senate, and only twelve Republicans voted against the Act in the House of Representatives.
In the 2020 primaries, a number of Democrats campaigned on the platform of bringing the gift and estate tax exemption back down to, or lower than, what it was prior to the Tax Cut and Jobs Act of 2017. Additionally, several proposed or supported increasing the flat tax rate for the gift and estate tax. Even if Congress is unable or unwilling to lower the gift and estate tax exemption, these provisions are scheduled to sunset on December 31, 2025, which would bring the gift and estate tax exemption back down to what it was before the Act was passed (adjusted for inflation). Regardless of your political position on the gift and estate tax exemption, our current political reality creates serious issues with any long-term gift and estate plan.
Nobody knows when they are going to die, and situations where an estate plan is intentionally tailored for a one year window are few and far between. Depending on what happens in November, the gift and estate tax exemption may look different as early as 2021. At the very least, the Act is set to sunset by the end of 2025, unless Congress decides to extend it.
Should you be making lifetime gifts now while the exemption is high? Should you be forming trusts or other entities to maximize the use of your estate tax exemption? Is charitable gifting a desire and an option for you? Should you be making charitable gifts while you are alive or after you pass? How do you preserve the unused exemption of a spouse who passes away while the gift and estate tax exemption is as high as it currently is?
It is always important to understand how to maximize the use of your gift and estate tax exemption. Especially when the current political climate creates so much uncertainty. The attorneys at Ohnstad Twichell, P.C. provide a wealth of knowledge to help you navigate through these uncertainties. Please contact us at 701-707-0310 to schedule an appointment to discuss which options may be best for you.