For much of 2021, there was plenty of angst expressed in the news with regard to the potential reduction of an individual’s federal unified gift and estate tax exemption amount. That exemption, $11.7 million per individual in 2021, was regularly threatened by several bills filed in Congress to reduce the exemption to a much lower amount. In one bill the drop was to $5.0 million; in another bill, the proposed reduction was down to $3.5 million per individual.
When the dust finally settled in 2021 with the Build Back Better Act, no changes were made to the federal gift and estate tax laws, either in the transfer tax rates imposed (40%), or the amount of the transfer tax exemption amount. In fact, in 2022 an individual’s federal unified gift and estate exemption amount increases to $12.06 million (or $24.12 million for a married couple.)
A recent release of data from the Internal Revenue Service shows just how much the revenues generated by the federal estate tax have dropped since the 2017 Tax Act, when the exemption amount was doubled. Some interesting numbers culled from filed federal estate tax returns include:
- In 2018, there were 5,500 federal estate tax returns filed, which generated $20 billion in tax revenues;
- In 2019, there were 2,570 federal estate tax returns files, which generated $13.2 billion in tax revenues; and
- In 2020, there were 1,275 federal estate tax returns filed which generated $9.3 billion in tax revenues; another 2,166 federal estate tax returns were filed, but none generated any tax revenues.
Other interesting information gleaned by the IRS from filed estate tax returns in 2020 included the following:
- Publicly traded stock ($31.9 billion) was held the most wealth for estates;
- Closely held stock ($14.6 billion) was next in line for estates that filed returns;
- Bequests to surviving spouses totaled $39.7 billion, of which $4.6 billion was taxable;
- Surviving spouses added $15.6 billion to their exemption amounts through an election to claim portability of their deceased spouse’s unused transfer tax exemption amount; the returns filed to elect portability were 195 for gross decedent’s estates that ranged from $10 million to $20,000;
- Personal Representatives charged decedent’s estates $2.6 million in fiduciary fees;
- Attorneys charged decedent’s estates $2.4 million in fiduciary fees; and
- Charitable bequest estate tax deductions totaled $27.4 billion, which was an increase over 2019 when decedent’s estates claimed $21.9 in charitable gifts. [For comparison purposes, in 2020 charitable donations for federal income tax deduction purposes were a record $471 billion!]
Before the death of the dreaded death tax is pronounced, it is important to remember that the 2017 Tax Act doubled an individual’s federal unified gift and estate tax exemption only through 2025. If Congress does not act to change that sunset date, an individual’s exemption will drop come 2026 to somewhere around $6.0 million (as the exemption is adjusted annually for cost-of-living.) If the lower exemption amount appears in 2026, the federal estate tax revenues will likely start to dramatically increase again. Congressional Budget Office projections estimate that after the sunset, estate tax revenues will climb to $55 billion by 2031.
With the sunset scheduled to arrive in another four calendar years, it still makes sense to make large lifetime gifts using the available exemption amount. Additionally, individuals can continue to take advantage of several estate planning techniques to either shift wealth to younger individuals or to freeze asset values in an individual’s estate through grantor retained annuity trusts (GRATs), qualified personal residence trusts (QPRTs), sales to intentionally defective grantor trusts (IDGTs), and through low interest loans to family members.