Dramatic Reduction in Estate and Gift Tax Exclusions?

The current exclusion from federal estate and gift tax is $13.61 million in 2024 ($27.22 million for a married couple). The 2018 “Tax Cuts and Jobs Act” that created the “Bonus Exclusion” has a “sunset” provision that will cause a reduction of the exclusion to about $6 million ($12 million per couple) for taxpayers dying after December 31, 2025.  

If your assets are such that reductions in these exemptions are a serious concern (especially if your taxable estate may exceed $6 million), you should consider taking action or speaking to your tax advisor as soon as possible. The U.S. Treasury adopted regulations called the “anti-clawback rules.” These regulations protect a taxpayer who uses the Bonus Exclusion before the earlier of (1) December 31, 2025, or (2) the effective date of any new tax law reducing or eliminating the Bonus.

It is of real concern that any elimination or reduction in the bonus exclusion could be made retroactive to January 1 of the year in which it was enacted. There is precedent for this. The federal estate tax law that existed prior to 2010 automatically expired, due to a sunset provision, on December 31, 2009. Congress did not enact the present estate tax until December of 2010, but made it retroactive to January 1, 2010.

A number of persons with taxable estates, including the billionaire owner of the New York Yankees, George Steinbrenner, died during the period when no federal gift tax was in effect. To avoid protracted litigation over what appeared to many an ex post facto law prohibited by the U.S. Constitution, the Congress authorized the estates of taxpayers who died during the “gap period” to elect either: (1) to pay no estate tax, but receive no “step-up” in the basis of assets (the step-up was also a part of the law that had expired); or (2) to pay the new estate tax and receive a step-up in basis.  Any new federal estate tax legislation could (but might not) come with a similar option for the estates of taxpayers who died between January 1 and the date of any estate tax changes enacted later in the year.

Outright gifts to children, or to a “Dynasty Trust,” are the safest strategies – i.e., least likely to be retroactively affected by the so-called “anti-abuse rules” that the Treasury did NOT enact (but “reserved space” for) when it enacted “anti-clawback” rules.

The 2024 Maine estate tax exemption is $6.8 million per taxpayer (indexed to the federal exemption, but not including the Bonus Exemption). If the federal Bonus Exemption is simply allowed to expire, the Maine and federal exemptions will be the same — unless the Maine Legislature acts to disconnect the Maine exemption from the federal exemption.

Unlike the U.S. Congress, however, the Maine Legislature has never enacted a tax law with retroactive provisions. Also unlike federal law, Maine has no gift tax – except that gifts made within one year prior to death are taxed as if part of the decedent’s estate. Therefore, any gifting strategy that uses the federal Bonus Exemption will also avoid Maine estate tax if the donor survives more than a year after making the gift.

Rev 1/24

The information presented on this website is general in nature and not intended to be legal advice. No attorney-client relationship will exist with Jones, Kuriloff & Sargent, LLC unless agreed to in writing. Please contact us to discuss your particular situation.