Do You Need to Worry About Estate Taxes?

Here at McIntyre Elder Law we handle a lot of testamentary gifts, be it through a will or trust. And, a question we get all the time is “will I or my heirs have to pay estate or gift taxes?” The answer is usually “no”. To be honest, there are currently very few individuals who walk through the door who will have to worry about estate or gift taxes. But that will likely change in the near future. 

The Estate Tax

            The estate tax has deep and ancient roots. The concept of taxing the transfer of property at death can date itself back to ancient Egypt. Thus, our American forefathers were not creating anything new when they enacted the first estate tax in the US through the Stamp Act of 1797. 

            Since that time, the estate tax has had a tumultuous history. After the repeal of the Stamp Act in 1802, the US did not see an estate tax until 1862, when Congress enacted the 1862 Tax Act to help fund the Civil War. But, the estate tax provision of the act was soon repealed after the war. Finally, the modern estate tax was enacted in 1916. Since then, the estate tax base—the amount subject to tax—and rates—the amount of the tax itself—have fluctuated widely. 

Fast forward to the new millennium, Congress enacts the Economic Growth and Tax Relief Reconciliation Act of 2001. This bill phased out the estate tax over the period of 10 years and included a provision that would end the estate tax after that 10-year period. However, this provision was subject to a one-year sunset. Congress did not renew the provision in 2011 and the estate tax came back. 

Who is Subject to the Estate Tax?

            Today the estate tax is still alive and kicking. But, the 2016 Tax Cuts and Jobs Act (TCJA) significantly altered who will be affected by the tax. Before the TCJA, estates valued above $ 5.6 million would be subject to the tax. The TCJA raised that rate to $11.18 million for individuals and $22.36 million for married couples. Thus, under the current law, if an estate is valued less than the threshold amount, they will not owe federal estate taxes. 

            While the new threshold amount seems out of reach for most, that amount is set to sunset Jan 1, 2026. After that it will revert back to the $5.56 million amount. Although, there has been a push among some politicians to lower the threshold amount even further. Thus, there is a significant likelihood that we could see the estate tax creep into the lives of the middle class before the 2026 sunset date. 

What About Gift Taxes?

            Estate and gift taxes work in tandem, meaning that the threshold amount includes both gifts during life and the value of the estate (less applicable deductions and exclusions). This means that an individual will not be taxed on the transfer of a gift during their lives unless the gift puts them over the threshold amount. In other words, an individual can give away up to the threshold amount during their lives and not be subject to the gift tax. 

But, What About the Gift Exclusion Amount?

            This is the issue that confuses most people. The best answer is that the exclusion amount (currently $15,000 per person, per year) determines whether or not the gifts given should be reported to the IRS. The IRS keeps a running tally of how much is given during a person’s life time. If at the end of that person’s life they have gifted above the threshold amount, they will be subject to estate taxes. But, if an individual does not make gifts above the exclusion amount, those gifts are not required to be reported and they do not count toward the threshold amount. 

What Does This Mean for You?

            Fortunately for individuals who want to preserve their assets and protect from depletion of their estate after their passing, we are in a short period of relief from the estate tax. Unless your reportable lifetime gifts exceed the threshold, the value of your estate exceeds the threshold, or both your reportable lifetime gifts and your estate exceed the threshold amount, your estate will not be subject to the federal estate tax. 

            However, it is important to remember the history of the estate tax, namely the frequency at which it has changed. It is important because the estate tax may currently be favorable for most, but history is doomed to repeat itself. That means that the estate tax can once again become a factor for a large percentage of the population. 

With the recent midterm elections and the upcoming presidential election, there is a significant likelihood that the estate tax can, once again, come knocking at the door of middle-class Americans. If that is the case, there are options out there. 

Putting assets in trust now, such as a credit shelter trust, will help insulate your assets from a change in the tax laws. Also, making lifetime gifts—under the exclusion amount—can help to spend down your estate below the applicable threshold level. 

Planning ahead is especially important for seniors because of the three-year rule for gifts. For gifts, there is a three year look back period that begins at the date of death back three years. The three-year rule says that property gratuitously transferred within three years of the decedent’s death is included in the value of the decedent’s estate. Thus, in a quickly changing political climate it is imperative to plan ahead for the inevitable fluctuation in the estate tax threshold level. 

            If you have questions about your estate plan, or how you may be affected by federal or local estate taxes, contact a qualified Estate Planning Attorney to assist you.

Brenton S. Begley, JD, LLM Taxation

Attorney with McIntyre Elder Law