The exemption from estate tax is the amount you can file without facing an estate tax. Under current law, you can file this amount during your lifetime or upon your death and after using that amount, you face a 40% federal tax on assets that exceed this amount. The quantity has fluctuated greatly over the years. It was $675,000 as of 2001. In 2021, the exclusion was $11.7 million per capita. This exclusion consists of a “permanent” $5 million exclusion, adjusted for inflation since 2011, then temporarily doubled through 2025 as a result of the 2017 law. So, unless Congress takes action to extend the doubled exclusion, it will come back to an adjusted $5 million. For inflation that begins in 2026. Confusing, isn’t it?
However, Congress could act sooner in 2026 to reduce exclusion. Congress has manipulated the estate tax many times over the decades. So, this wouldn’t be anything new.
Biden’s campaign proposals indicated a desire to reduce the estate tax exclusion to $3.5 million. Such a proposal would need to pass through the House of Representatives, which Democrats control by a narrow majority of 222 to 211 seats held by Republicans, with two seats currently vacant. Assuming that legislation to limit the estate tax exclusion passes through the House of Representatives, it will then pass through the Senate.
At the beginning of January, the Senate consisted of 50 Republicans, 48 Democrats (and the Independents caucus with Democrats) and two seats awaiting runoff elections in Georgia. The Democrats beat long odds, winning both Georgia run-offs, so the Senate is now tied by 50-50. That means the vice president casts a tie-breaking vote in the Senate. Prior to January 20, 2021, Vice President Mike Pence enabled Republicans to retain a majority. However, on January 20, 2021, Vice President-elect Kamala Harris will be sworn in as Vice President and the majority in the Senate will shift to Democrats.
Thus, starting January 20, 2021, Democrats will have the narrowest majorities in the House and Senate. Even with a narrow majority, there are obstacles to its passage in the Senate. Senate rules require 60 votes to end debate on most matters. Also, it is not at all certain that every Democrat will agree, as they are often a divided bloc.
But as the deficit grows, Congress may seek to increase revenue from many sources, including reducing the exclusion from property taxes. Why wait to see what Congress does? Your best chance to take advantage of the current unprecedentedly high exclusion is to use it now.
If you are married, you may grant assets in the amount of the remaining exclusion to a trust fund for the benefit of your spouse and/or grandchildren. Your spouse can be a trustee of the trust and will have the ability to use the assets to support them. If you are unmarried, you can give your assets to a trust for your grandchildren.
The political events of January have dramatically changed the political landscape. Consider whether taking advantage of the current property tax exclusion is right for you. Talk with a qualified estate planning attorney about your options.
Stephen C. Hartnett, JD, LLM
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128