What You Need To Know About The Future Of The U.S. Estate Tax Exemption
The big topic among U.S. tax planners as we move into this year’s tax season is the estate tax.
Trump increased the lifetime exemption in his 2017 Tax Cuts and Jobs Act.
It’s set to revert to its previous level—US$5 million, adjusted for inflation—in 2026.
However, Biden has stated that he wants to reduce the exemption to US$3.5 million… while also increasing the rate of estate tax from the current 40% to 45%.
Many rushed to set up offshore trusts after the November 2020 election results. They wanted the structures in place before the end of the year, hoping to get ahead of potential changes like the ones Biden is now proposing and understanding that any change to the law in 2021 could be made effective retroactively to Jan. 1.
The good news is that you do not have to wait until you die to avail of the estate tax exemption.
You Can Take Advantage Of It At Any Point During Your Lifetime
You could, for example, set up a trust today and gift it US$11.7 million (the current exemption amount).
This would make it possible for you to take advantage of the current exemption levels while still allowing those assets to continue to grow without the threat of the estate tax.
Of course, the trust still pays income and capital gains taxes each year.
For many, the US$3.5 million exemption that Biden has targeted seems like a big number. You, too, may not think that you’ll ever need to worry exceeding that level of wealth during your lifetime.
I’d suggest that you remember the effects of inflation.
When you allow for inflation, the US$675,000 exemption amount from 2001 is equal to US$1 million today.
And the median house price in the United States has doubled in the last 20 years.
Someone who bought 1,000 shares of Amazon in 2001 at US$15 a share and held them is now sitting on more than US$3 million.
It’s not out of the realm of possibility that you could find yourself the proud owner of assets greater in total value than the amount of the U.S. estate tax at some point in the future.
Which Brings Me To My Point…
As I perpetually advise, take advantage of the rules while you can—to do with residency options, naturalization opportunities, banking windows, and tax breaks…
Because they change regularly… including and especially to do with taxes.
Do not assume that some option available to you today will be available to you forever.
Even if the Biden administration doesn’t reduce the amount of the estate tax exemption, as he’s suggesting he intends to do, the number still reverts to the pre-2017 figure in 2026.
No matter what your net worth today, planning ahead can keep you from paying unnecessary estate taxes.
If there’s any chance you’ll exceed the estate-planning exemption during your lifetime, I suggest speaking with an estate-planning pro now.
You can reach my recommended advisor here.
Lief Simon