Estate Planning Gets a “Raise” in 2021

| Jan 6, 2021 | estate and tax planning, Estate Planning


It’s official – there are new estate and gift tax limits beginning this year. The estate and gift tax exemption has now risen to $11.7 million. Bottom line, individuals are allowed to pass up to $11,700,000 worth of assets to others (this includes gifts made during life as well as those made upon death), with no federal estate or federal gift tax owed. ( Married couples can give or bequeath double that amount ($23.4 million) tax free.

It is unclear whether these exemption amounts will remain in effect in 2021. President Elect Biden has proposed increasing the estate and gift tax rates to a top rate of 45% (currently, it is at 40%) and lowering the estate tax exemption equivalent to $3.5 million per individual ($7 million per married couple); however, these proposals would take Congressional support. We will have to wait and see what happens in the Georgia runoff election on January 5, 2021 to determine if control of the Senate passes to Democrats. If the Senate remains controlled by Republicans, it is unlikely that Biden’s proposed estate tax changes will pass.)

It’s always interesting to look back in history to see how different laws came to be passed in the first place. The United States has taxed estates since 1916, and gifts have been taxed since 1924. Finally, in 1976 Congress linked together gift, estate, and generation-skipping taxes into one system. The intent was to prevent donors from “getting around” the estate tax by transferring all their wealth before they died or by “skipping a generation” by gifting to grandchildren or great grandchildren. Setting limits on the combination of lifetime gifts and legacies after death was done in an attempt to solve those issues, the Tax Policy Center’s Briefing Book explains….

In related good news that does not represent a change over last calendar year, the annual gift exclusion amount for 2021 remains the same as last year – $15,000 per donor. Married couples can combine these amounts and make $30,000 gifts to each individual, doubling the impact. In addition to the $15,000 amount, each individual can make unlimited payments for medical and tuition expenses as long as such payments are made directly to the institution providing the service. Gifts are not limited to relatives, but may be made to individuals of one’s choice. Those annual gifts are exempt from the system described above.

For the majority of Americans, even if Biden’s estate tax changes pass, there will not be a need for their estates to file a tax return. In 2020, for example, fewer than one tenth of one percent of the 2.8 million people who died needed to file estate tax returns; only half of those needed to pay any tax!

At Geyer Law, we find annual gifts to be a highly useful estate planning tool for a broad range of clients. Hayden Adams, director of tax and financial planning for the Charles Schwab Center for Financial Research, said it best: “When it comes to sharing your wealth, there may be no better time than the present”. Just why is it often best to give money or assets to your loved ones while you’re still around?

1. Both the present value and any potential future growth of the assets are removed from your taxable estate.
2. Giving when your friends or relatives need help is more meaningful than waiting to pass on a larger amount after you’re gone.
3. You’re allowed to give the annual exclusion amount to as many different people as you like!
4. It’s easy to give annual gifts. Unless the gift is “split” between a couple, there is no need to file any tax forms. (Of course, if you exceed the annual gift limit to any one person, you would need to let the IRS know about it by filing a gift tax return.)

Estate planning has indeed “gotten a raise” this year in the form of an increased.estate and gift tax exemption. There’s more to explore, though, in terms of your giving plan. Stay tuned, because next week we’ll be reviewing four more tactics for smart gifting in 2021.

Cara Chittenden, Associate Attorney at Rebecca W. Geyer & Associates