Dramatic Reduction in Estate and Gift Tax Exclusions in 2021?

The current exclusion from federal estate and gift tax is $11.58 million ($23 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 the Democrats take control of the Congress and the Presidency after the November elections, many commentators predict that these amounts will be dramatically reduced sooner, possibly in 2021 — perhaps to $3 million ($6 million per couple), the amounts proposed by Bernie Sanders as part of his platform.

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 recently 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.

To be cautious, you should assume that any elimination or reduction in the bonus exclusion will be 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.

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 current Maine estate tax exemption is $5.8 million per taxpayer (indexed to the federal exemption, but not including any 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. Legislative action to reduce this exemption seems likely, due to the impact of COVID-19 on Maine government revenues.

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 10/20

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.

Jones, Kuriloff & Sargent, LLC