Hey there, Legal Tea Listeners – This is your host, Jenny Rozelle. Welcome back for another episode today – episode 167! Today is a “current trends” topic where we talk about things going on currently that are relevant and pertinent to my estate and elder law world, and/or maybe things I’ve seen on the news or stumbled across on social media. Well, today’s episode is a timely one … I’m sitting here scripting out this episode on November 7th, two days after President Trump was re-elected. Now, a big thing that often swings in different ways based on who is in the White House and who is the Senate and House – is taxes. Because of Trump’s re-election, he’ll soon be in the White House again and with that, there are a lot of people like me – those in the legal, tax, and financial space – wondering what will happen with federal estate taxes. So, let me give you some background first, and then we’ll dive into the “now what?”
If you did not know, the federal estate tax exemption is supposed to sunset (or decrease) at the end of 2025. And many are wondering if that’s actually going to end up happening. Now, before we even get started on the specific topic, I think it’s incredibly important to get crystal clear on WHAT the estate tax even is and I say this because so many get the types of taxes confused. Gnerally speaking, there are two types of taxes that are pertinent to my little estate world when someone passes away – 1) inheritance tax and 2) estate tax. One of the biggest differences between inheritance tax and estate tax is WHO gets taxed when it’s pertinent? With inheritance tax, the BENEFICIARY receiving the inheritance is “who” is taxed while with estate tax, the ESTATE of the DECEASED PERSON gets taxed BEFORE the distributions are made to the beneficiary.
Now, here in my state of Indiana, they repealed the inheritance tax, but there are a small number of states that DO still have an inheritance tax, so be mindful of that. Something to know/remember, there is currently no FEDERAL inheritance tax – just state. Also, before I shift to estate tax, I also think it’s pertinent to bring up “income tax” in relation to inheritance tax and here’s why – if you inherit an account that is pre-tax dollars, say like a Traditional IRA, 401K, 403B, etc., and you start taking distributions out of those types of account as a beneficiary, you WILL be taxed on it, but that’s an INCOME TAX not an inheritance tax. So, just a quick clarificaiton.
Shifting to estate tax, again this is the tax that happens on the ESTATE of the DECEASED PERSON before the beneficiary gets their inheritance, there IS a FEDERAL estate tax and even some states have state estate tax. Annoyingly confusing, right? The difference (between a state estate tax and the federal estate tax) is really just who gets the money – if it’s a state tax, the state gets it; if it’s a federal tax, the feds get it. So even if you live in a state that does not have a state estate tax, there’s a FEDERAL estate tax that we all have to be mindful of.
Currently, in 2024, the FEDERAL estate tax exclusion amount is $13.61 Million Dollars per person – so as a married couple, you actually get two of those. As a married couple, you get over $27 Million Dollars as an exemption. What does that actually mean? That means that estates that have LESS THAN that amount ($13.61M individual, $27.22M couple), there is not an estate tax imposed on your estate when you die. However, if your estate exceeds that amount, the amount of assets that EXCEED that amount are taxed at a fairly not-nice rate. Something to be mindful of, though, is that of those states I named that have state estate tax, if their state exclusion amount is higher or lower, you may be subject to state estate tax and federal estate tax – or just one.
So, that’s where we stand currently; this episode, though, referred earlier to how the FEDERAL estate tax exemption is supposed to sunset (or decrease) at the end of 2025. That’s what is currently on the books supposed to happen. So, to give you a little context, here’s the quick scoop – in 2017, the Tax Cuts and Jobs Act passed and through that, the federal estate tax exclusion amount increased from $5Million-ish to $10Million-ish (which over time, has been adjusted to inflation – and that’s how we’re currently at 13.61Million per person. Now, the thing about the Tax Cuts and Jobs Act is that it was a TEMPORARY thing because there’s something called a “sunset provision” as part of it.
What does that mean? Well, what it means is that without further action from Congress, the federal estate tax exclusion amount will go back to pre-Tax Cuts and Job Act, but yet adjusted for inflation, which depending on the source, would take us to somewhere between $6-7 Million Per Person (so somewhere $12-14 Million as a married couple). Now, one of the HOT things to talk about in my nerdy little land is whether Congress will take any further action – and many thought that it really was contingent on how Election Day went. If you’re wondering even what I mean … basically, it’s that Congress COULD alter the path that this is heading. Congress could swoop in and say, “Nope – let’s NOT this sunset at the end of 2025. Let’s keep ‘er going!”
The ”word on the street” was that if Democrats took the White House and could get things through Congress, it was likely that that they would let the amounts sunset – and we’d go back to lower estate tax exemption levels. Alternatively, the “word on the street” was that if Republicans controlled the White House and Congress, they’d like extend the Tax Cuts and Jobs Act and NOT let the high exemption amounts expire. So, now we sit here today, we know that President Trump was re-elected and the Republicans have majority control in the Senate and House (so Congress). I won’t bore you with how these things work, but just because there’s a majority doesn’t mean it’s a “definite” that Congress is going to step in and NOT let it sunset.
You know, in my thirteen year career so far, something I’ve learning in the estate space is not to react too dramatically. There have been so many times that the news (and even politicians) are saying XYZ and really, XYZ doesn’t happen at all – sometimes, because they can’t get it through Congress. So, because of that, I operate by “What does the law CURRENTLY say?” and go from there. The law CURRENTLY states it is supposed to sunset, so if your estate so happens to be in the millions like that, start planning now. Start seeking advice now – and actually you may be a little behind the game. At this point, you have basically a year.
Something else to consider, especially when the Election results simmer down a bit, I would not sweat whether Congress is going to take action – if they do and they leave it high, then if you’ve done planning, you are set for if the exclusion amount comes back down … even if they do say to keep it, would they keep it that high forever? We don’t know! And if they don’t (as in Congress doesn’t take action or if the exemption happens to be lowered by the time you die), you will SURE be thankful you got your rear into gear to get a plan in place.
To me, this is all about assessing your risk. My personal opinion is that IF anything is done about the Tax Cuts and Jobs Acts and the sunsetting estate tax exemption, it’ll probably be done in the 11th hour. Maybe I’m wrong, but that just seems how things happen around there. I bring this up because… if they wait until the 11th hour, you may not know until it’s too late to actually get a plan together or not. So, if you agree (that they often wait until the 11th hour), you’re basically left with a risk assessment – get a plan together now or not. If you don’t want to make any dramatic changes to your plan now, I totally get that too – and if that’s the case, perhaps just make sure you’re working with a good team of professionals around you – legal, tax, and financial – because we’re watching this topic like a hawk!
In fact, if you’re more in the camp of “let’s wait and see” – then you’re certainly not alone. In fact, I was doing some research for this episode and found an article on ThinkAdvisor.com (linked in the source links, of course) – and there were two individuals in it that both basically said “you can probably breathe and not do anything too dramatic.” One was Ben Henry-Moreland, a Certified Financial Planner, who said: “It is likely that many financial planners and clients who have been feeling pressured to consider making major estate planning decisions ahead of the TCJA sunset are now going to be hitting the brakes. But that doesn't mean it is appropriate for all clients to change their plans for late 2024 and 2025.” He noted, like I said earlier in this episode, there are state tax considerations to remember (that are typically lower than the federal level anyway).
Another person interviewed for the person was Leslie Gillin Bohner, the Chief Fiduciary Officer at Fiduciary Trust International, agreed with Ben’s comments and said herself, “"I believe there is clarity. Most … provisions will likely be extended. So there is no rush to change estate plans and most individuals can adopt a wait-and-see approach and do planning on their own timeline to use their remaining exemption amounts."
So, all of this is something to consider – and especially even more timely with the recently-elected Trump. Unfortunately, there’s never a one-size-fits-all answer; some may choose to go ahead and do additional tax planning just in case it doesn’t sunset; some may hold off a bit longer and see if that’s something they want to tackle, especially if it becomes the 11th hour I was talking about earlier. A final last comment – like the ThinkAdvisor also notes, all of this really only applies to families who have several million in net worth – so of course, this stuff doesn’t apply to everyone out there, but if it does, it’s certainly good to know and stay on top of.
Alrighty, let’s wrap this episode up, shall we? Next week, we’re back to the “celebrity estate planning” type of episode – and during that episode, we are going to dive into what happened estate-wise following the passing of Charles Kuralt, who is best known for his time spent on CBS. He has quite the estate story, so tune in for an episode on him and his estate next week. Alrighty, Legal Tea Listeners, talk to you next week and stay well!
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