Will estate tax exemptions change in 2021?

On Behalf of | Dec 4, 2020 | Estate Planning

Taxation is always an important political topic, especially when there is a change in the Presidency. Regardless of how closely you follow politics, it is important to consider how a Presidency change could impact your personal life and your financial situation, specifically taxes.

Regardless of how much money a person makes or how much wealth a person has accumulated, taxes play a significant part in a person’s financial situation. While people tend to be more aware of their income taxes, they may not be as aware of other types of taxes that could affect them, particularly estate taxes. With a change in our national leadership, it is important to learn about the proposed changes so that you can adjust your estate plan, if necessary, to protect your estate and plan accordingly for the possibility of your estate being responsible for estate taxes.

Estates over the federal tax exemption rate must pay

Those who designate their assets to beneficiaries hope for a smooth transition after they pass away. However, those who fail to plan may find that their estate could be responsible for significant taxes that can leave their heirs with less than anticipated.

The IRS imposes a federal estate tax on the estate of all U.S. citizens upon their death. However, the IRS also grants an exemption from federal estate tax. This means that individuals who die with estates that do not exceed the exemption will pay no estate tax, while individuals who die with estates that do exceed the exemption, will owe some amount in estate taxes.

In recent years, the estate tax exemption has been historically high, meaning very few people will owe estate tax when they die. Currently, estimates suggest only 0.1% of American estates are currently taxable. For example, the federal estate tax exemption for the year 2020 is $11.58 million per individual. This means that only those who die with estates that exceed $11.58 million will owe estate tax. The current estate tax rate for these estates is 40%. However, estate tax exemptions and rates change depending on the ruling parties, so these rates may not hold in 2021 or thereafter.

Estate tax exemption trends

Looking back to 1997, the estate tax exemption was set at $600,000 and the tax rate was 55%. The Taxpayer Relief Act then set the stage to increase this threshold. The following years saw changes to the exemption levels, including:

  • An exemption increase to $1,000,000 by 2002, with a tax rate of 55%
  • An exemption increase to $3,500,000 million by 2009, with a tax rate of 45%
  • An exemption increase to $5,000,000 by 2011, with a tax rate of 35%
  • An exemption increase to $11,800,000 by 2018, with a tax rate of 40%

2021 could see estate tax exemptions cut in half

We could see additional changes this coming year. New leadership has proposed decreasing the current tax exemption. While an exact exemption and tax rate has not yet been set, there are reports that suggest that the exemption could be reduced by half, back to the exemption amounts to the pre-2018 levels, perhaps even lower or possibly higher. Such a reduction in the exemption would expose more estates to estate tax.

Although a majority of individuals will never have to worry about paying estate taxes when they die, based on today’s laws, it is important to understand estate taxes because the laws are continually changing. For those who do have estates that could be taxed, it is especially important to consider what planning you can do in order to minimize estate taxes when the time comes.