The 2017 Tax Cuts and Jobs Act (the “Act”) increased the federal estate tax exclusion amount for decedents dying in years 2018 to 2025. The exclusion amount for 2021 is $11.7 million. This means that an individual can leave $11.7 million and a married couple can leave $23.4 million dollars to their heirs or beneficiaries without paying any federal estate tax. This also means that an individual or married couple can gift this same amount during their lifetime and not incur a federal gift tax. The rate for the federal estate and gift tax remains at 40 percent.
Portability Election and Federal Estate Taxes
The Portability Election, which allows a surviving spouse to use his or her deceased spouse’s unused federal estate and gift tax exemption, is unchanged for 2021. This means a married couple can use the full $23.4 million exemption before any federal estate tax would be owed. To make a portability election, a federal estate tax return must be timely filed by the executor of the deceased spouse’s estate.
For 2021 the annual gift tax exclusion remains at $15,000. This means that an individual can give away $15,000 to any person in a calendar year ($30,000 for a married couple) without having to file a federal gift tax return and without counting toward their lifetime exemption amount.
Tax Exemption and Portability in New York State
Despite the large Federal Estate Tax exclusion amount, New York State’s estate tax exemption for 2021 is $5.93 million. New York State still does not recognize portability.
New York has a three-year lookback on gifts as of January 16, 2019. However, gifts will not be includable in your estate if made within this time period if made by a resident or nonresident of real or tangible property located outside of New York State; while the decedent was a nonresident; before April 1, 2014; between January 1, 2019 and January 15, 2019.
If you are concerned about an increase in the federal estate and gift tax rate and decrease in the exemption due to the change in the presidential administration, now is the time to use your estate and gift tax exemption through lifetime gifts. By making lifetime gifts over the $15,000 annual exclusion, you utilize your estate and gift tax exemption. The IRS finalized rules in 2019 stating that it would not “claw back” lifetime gifts when the exemption is lowered. This means that an individual can give his or her entire estate and gift tax exemption ($11.58 million) in 2020 and not be affected by a reduced estate and gift tax exemption under the new administration.
To utilize the benefit of the larger estate and gift tax exemption in 2020 from a potentially reduced amount in 2021 and beyond, the gifts need to be substantial. Meaning that this gift would have to greater than the anticipated new exemption (the Biden plan proposes a $3.5 million exemption) to utilize what would be “excess” exemption. The proposed estate tax rate on amounts over $3.5 million is increased from 40% to 45%. If the excess exemption is not used before the exemption is lowered by Congress in a new legislation, then that “excess” would be lost and amounts remaining in your estate over $3.5 million at your death (assuming there is no surviving spouse) would be taxed at 45%.
Estate Tax Planning for High Net Worth Asset Protection
Most taxpayers will never pay a federal estate tax under the current Act. If the federal estate tax exemption is reduced to $3.5 million, many more estates would be subject to a federal estate tax, especially on Long Island. It is critical to begin long-term estate tax planning if you or your spouse have an estate that is potentially taxable under New York State law or taxable under the proposed changes to the federal estate tax laws.