IRS Announces Higher Estate And Gift Tax Limits For 2021

The Internal Revenue Service announced today the official estate and gift tax limits for 2021: The estate and gift tax exemption is $11.7 million per individual, up from $11.58 million in 2020. That means an individual could leave $11.7 million to heirs and pay no federal estate or gift tax, while a married couple could shield $23.4 million.

But what if former vice president Joe Biden is elected president? That could mean an end to the staggeringly high estate and gift tax exemption amount enacted as part of President Donald Trump’s signature tax overhaul. Trump’s tax overhaul doubled the then-$5 million per person base level exemption amount to $10 million, from 2019 through year-end 2025, with a flat tax rate of 40%. (The $10 million is indexed for inflation; that accounts for the $11.7 million figure.) Republican death tax foes vow to make the doubled exemption amount permanent. By contrast, criticizing the Trump tax cut as a giveaway to the wealthy and citing economic inequality, Biden has proposed restoring estate and gift taxes to their 2009 level: $3.5 million per person for the estate tax, $1 million for the gift tax, and a top rate of 45%. 

The IRS announced the new inflation-adjusted numbers in Rev. Proc. 2020-45. Forbes contributor Kelly Phillips Erb has all the details on 2021 tax brackets, standard deduction amounts and more. We have all the details on the 2021 retirement account limits, including the higher $58,000 overall 401(k) limit, too.

If you’re rich and you’re worried about the estate and gift tax exemption amounts going down, the time to start a gifting plan is now. The IRS finalized rules last year saying that it wouldn’t claw back lifetime gifts if/when the exemption is lowered.

The annual gift exclusion amount for 2021 stays the same at $15,000, according to the IRS announcement. What that means is that you can give away $15,000 to as many individuals—your kids, grandkids, their spouses—as you’d like with no federal gift tax consequences. A husband and wife can each make $15,000 gifts, doubling the impact. Separately, you can make unlimited direct payments for medical and tuition expenses.

When you’re doing advanced estate planning—making gifts in excess of $15,000 annual exclusion gifts—you’re using your lifetime gift/estate tax exemption. With the new 2021 numbers, a couple who has used up every dollar of their exemption before the increase has another $240,000 of exemption value to pass on tax-free. For folks who are worried that that’s a lot to give, there are newfangled spousal lifetime asset trusts (aka a SLATs). They’re also IRS-tested advanced estate-freeze strategies like grantor-retained annuity trusts (GRATs) and installment sales to grantor trusts, where you give away the upside of assets transferred to the trust taxfree. For planning tips, see Trusts In The Age Of Trump.

Keep in mind the $23.4 million number per couple isn’t automatic. An unlimited marital deduction allows you to leave all or part of your assets to your surviving spouse free of federal estate tax. But to use your late spouse’s unused exemption—a move called “portability”—you must elect it on the estate tax return of the first spouse to die, even when no tax is due. The problem is if you don’t know what portability is and how to elect it, you could be hit with a surprise federal estate tax bill.

And note, if you live in one of the 17 states or the District of Columbia that levy separate estate and/or inheritance taxes, there’s even more at stake, with death taxes sometimes starting at the first dollar of an estate.

Here’s a look at the federal estate tax/gift tax exemption over the years, according to the Tax Policy Center:

2021: $11.7 million/$11.7 million

2018: $11.18 million/$11.18 million

2011: $5 million/$5 million

2009: $3.5 million/$1 million

2008: $2 million/$1 million

2003: $1 million/$1 million

Source: https://www.forbes.com/sites/advisor/2020/10/27/seeing-stars-7-spots-under-the-milky-way/#37bde5ff3c88