Currently less than one percent of American households have assets over $10 million and so would not have to worry about the Federal estate tax exemption of $12.92 million (in 2023) and indexed for inflation. Married couples can double the Federal exemption to be over $25 million! But in 2026 the Federal exemption will decrease to $5 million, affecting far more people.
This exemption is for both gift and estate taxes. To understand this concept requires a detailed conversation about gift taxes and for us to do some math (oh no!). Each year, you can give a certain amount ($17,000 in 2023) “tax free” to as many people as you want. What happens if you give someone more? It does NOT necessarily mean you must pay taxes, but it can require an extra tax return. Let’s look at two examples. If you made a gift to a child of $1,017,000, then $17,000 is tax free because of the annual gift tax exemption. The other $1 million reduces the $12.92 million gift and estate tax exemption to $11.92 million so that you can “only” pass $11.92 million to your heirs at your death without federal estate taxes. However, if you die after 12/31/2025 then that gift will reduce the $5 million exemption to $4 million and anything over that will be subject to an estate tax of up to 40%! The change to $5 million is retroactively subject to inflation and so the actual number may be closer to $6 million.
What does all this mean? First is that most people should just add a bit more flexibility into their estate plans as laws will continue to change. This isn’t the first major estate tax change and it won’t be the last. Second, for clients with high value, you only have a limited amount of time to do some planning that could use the $12.92 million exemption before it changes which results in a much larger amount that is exempt from estate taxes. It requires careful planning.
If you are interested in learning more about this change and how it may affect your personal trust or estate plan please call MGM Law Firm at 541-233-7441.