Blog Post

Planning for possible decrease of estate and gift tax exemption

Frazer Ryan • Sep 17, 2020

Recent federal spending and the outcome of the November elections could lead to a reduction in the combined estate and gift tax exemption, perhaps as soon as January 1.

The federal government imposes an estate tax when a person dies. The federal government also imposes a gift tax when gifts are made during a person’s life.¹ However, everyone is entitled to a combined estate and gift tax exemption from federal taxes. (Arizona does not impose an estate or gift tax.)

For persons who die or make gifts during calendar year 2020, the combined estate and gift tax exemption is $11.58 million per person. For example, if you made taxable gifts prior to 2020 in the amount of $3 million, your remaining combined exemption in 2020 is $8.58 million. If you die in 2020, and your remaining estate is worth more than $8.58 million, there would be a 40% estate tax on the excess amount.²

There is a concern that, based on (a) the amount of recent federal spending in response to the COVID-19 pandemic and (b) the outcome of the 2020 presidential and congressional elections, the combined estate and gift tax exemption may be substantially reduced, effective as early as January 1, 2021.

Under that scenario, our example above changes significantly. If you had made prior taxable gifts of $3 million, the exemption is reduced to $3.5 million, and you die in 2021, the value of your estate in excess of $500,000 (rather than $8.58 million in 2020) would be taxed at the 40% tax rate (or possibly higher).

If you share our concern that the combined estate and gift tax exemption may be substantially reduced next year and for years following, the way to use the higher exemption in 2020 is to make taxable gifts up to the $11.58 million maximum exemption amount prior to the end of the year.

If you are interested in making taxable gifts prior to the end of the year, you should contact your Frazer Ryan or Whetstine Law Firm attorney as soon as possible to start planning on how to best utilize the current exemption this year.

¹ Only gifts of a present interest of more than $15,000 per donee per calendar year are counted.

² This is a simple example and does not consider the unlimited marital deduction or charitable gifts you may make at death that are not taxed when you die.

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