Federal Estate and Gift Tax — do I need to worry?

If I took the most top of the mind issues for seniors right now it would probably be “did you receive your COVID-19 vaccine shot yet?” followed by, “if so, where did you get it and how long did you have to wait?” The next burning issues would likely be “what is the effect of changes in federal tax laws over the past year and also since the beginning of the Biden administration?” and “when will we receive stimulus checks?” Recognizing this, I understand that issues regarding the Federal Estate and Gift Tax might take a poor third or could also rank behind Medicaid, health and asset protection issues.

However, there is a small but hardy group of planners who continuously worry about the Federal Estate and Gift Tax and it is for that group I address this column. The short answer is unless you have very substantial wealth you likely do not have to worry about the tax. However, this does not mean there is no room for planning or that you should not bother to learn.

In 2017, with a Republican majority in Congress, the federal estate tax exemption doubled and then it was indexed for inflation. The exempt amount had been $5.49 million and had climbed from a mere $600,000 in 1997. The result is that, in 2021, unless your estate for an individual is $11.7 million dollars or more you do not have to be concerned about the federal estate tax now. Even if your combined estate and gifts are over $11.7 million, the tax at 40% affects only the amount over $11.7 million. Below that amount there is none.

If you are married, because of “portability” of the exclusion it is potentially $23.4 million. On gifting, the lifetime gift tax exclusion is also $11.7 million but because there is a unified estate and gift tax exclusion, it is a combined total of $11.7 million estate and gifts.

It does get better. If you gift up to the annual exclusionary amount which is currently $15,000 per year per person, you do not need to count those gifts toward the total. After that amount you are expected to file a gift tax return so that the excess would be counted against the $11.7 million and rising. A husband and wife can double the exclusionary gift which would not count against the total — so $30,000 — to each of the children, grandchildren and so on.

There is one cautionary note. In the year 2026 the exemption is scheduled to drop to the prior exemption amount of $5.49 million per person but adjusted for inflation. That still keeps the vast majority of Americans outside the range.

I raise this issue because so much of estate planning study is devoted to so few who are affected by it. It reminds me of a fellow attorney who commented a few years ago “why don’t we have more study of planning for average people?”

Having said this I recognize that many Americans believe the government demands they can only gift up to $15,000 a year and this is not necessarily a bad thing if it causes some seniors to hold onto funds they might otherwise need for their retirement and for care.

It seems that much of what is published regarding estate planning is frozen in 2017 or even 1997. At those times some estate planning techniques like “A-B” Trusts, ILIT’s (Irrevocable Life Insurance Trusts) and similar planning tools made more sense for average Americans.

There are some uses, however, for estate tax returns and gift tax returns and one of them may be to keep a permanent record of the number of large gifts and their value at the time of transfer. For very large estates the filing of an estate tax return on the death of the first spouse can identify the amount of the unified credit that is “portable” to the surviving spouse.

Also, even as to smaller estates, identifying this amount where there has been a second marriage may be helpful in connection with terms of a prenuptial agreement. I have done this and how would take longer than this column. Returns can also establish the “basis” of the property at time of transfer — another more complicated idea related to taxes — an idea for another day.

Janet Colliton, Esq. is a Certified Elder Law Attorney and limits her practice to elder law, retirement and estate planning, Medicaid, Medicare, life care and special needs at 790 East Market St., Suite 250, West Chester, Pa., 19382, 610-436-6674Call via Mitel , colliton@ collitonlaw.com. She is a member of the National Academy of Elder Law Attorneys and, with Jeffrey Jones, CSA, cofounder of Life Transition Services LLC, a service for families with long term care needs. Tune in on Wednesdays at 4 p.m. to radio station WCHE 1520, “A Plan Ahead,” with Janet Colliton, Colliton Elder Law Associates, and Ron Ehman, Real Estate Ron, Broker, Next Home Signature Real Estate.