What is the gift-tax exemption?
The estate tax exemption refers to the amount below which your estate is not subjected to any federal taxes when you pass away. This is likely to change and is expected to increase this year- 2021.
The federal estate tax exemption for 2021 is $11.7million
Right now, the estate tax and the gift tax are coupled to each other. So you get $11.7 million to give away while you are still alive or when you pass away- the amount is $23.16 million for a married couple. This may not be a bad idea if you are planning on passing on real estate property and appreciating asset if you can give them to your children now and it’s worth $2,000,000 but in 20 years from now it’s going to be worth $4,000,000, you only get dinged on your estate and gift tax limitation for $2,000,000.
Are many Americans going to be affected by the changes?
Given the size of the estate tax exemption, very few estates are actually affected. Important to note that Biden’s Administration has stated that they are not interested in seeking retroactive tax changes so this would be in effect going forward.
What is the implication of Biden’s new gift tax/ inheritance tax?
Part of the proposal for the change in state tax is to break that limitation and the proposal that’s being pushed now is to have a $3,500,000 estate tax but only a $1,000,000 gift tax. This means that you can only give away 1 million worth of assets when you are alive and then pass on the remaining $2,500,000 when you pass away. So breaking that can change the estate tax planning because you could give away assets now and be able to eliminate future appreciation.
What can you do?
Speak to your estate advisor as there are a number of estate planning techniques that can be used to minimize the effect of the increase in the gift tax rate for example estate freeze techniques that will allow you to give away the upside/ appreciation.