Estate Tax Law: Will the Current Gift and Estate Tax Exemption Level Change?

Introduction

The estate tax is a tax levied on the transfer of property after an individual's death. This tax has been around since the United States implemented its first estate tax law in 1916. The purpose of the estate tax is to generate revenue for the government, as well as to prevent the concentration of wealth and the creation of a permanent aristocracy. The estate tax law has undergone numerous changes over the years, and the current gift and estate tax exemption level has been a topic of discussion for many years. This essay aims to provide an overview of the estate tax law, including its history, purpose, and current status. Additionally, this essay will examine the arguments for and against changing the current gift and estate tax exemption level and will provide a conclusion based on available information.

History of Estate Tax Law

The United States implemented its first estate tax law in 1916, during World War I. The estate tax was initially created to help fund the war effort. The estate tax was abolished in 1926 but was later reinstated in 1932 as part of President Franklin D. Roosevelt's New Deal. Since then, the estate tax has undergone numerous changes, including changes to the exemption level and tax rate.

Purpose of Estate Tax Law

The estate tax serves two primary purposes. Firstly, the estate tax generates revenue for the government. Secondly, the estate tax helps prevent the concentration of wealth and the creation of a permanent aristocracy. The estate tax is designed to ensure that the wealthiest individuals pay their fair share of taxes and that their wealth is not concentrated in the hands of a few individuals. The estate tax also helps to prevent the accumulation of wealth over generations, which can lead to a permanent aristocracy.

Current Status of Estate Tax Law

The current gift and estate tax exemption level is $11.7 million per person, or $23.4 million for a married couple. This means that individuals can pass on up to $11.7 million of assets to their heirs without paying any estate tax. Any assets above this amount are subject to a 40% tax. The current gift tax exemption is also $11.7 million per person. This means that individuals can give away up to $11.7 million in gifts during their lifetime without paying any gift tax. Any gifts above this amount are subject to a 40% tax.

Arguments for Changing the Current Gift and Estate Tax Exemption Level

There are several arguments for changing the current gift and estate tax exemption level. Firstly, some argue that the current exemption level is too high and that it only benefits the wealthiest individuals. They argue that lowering the exemption level would generate more revenue for the government and help to reduce income inequality. Secondly, some argue that the current exemption level is unfair and that it penalizes individuals who do not have the same level of wealth. They argue that the estate tax should be based on a person's ability to pay, rather than on the value of their assets.

The current gift and estate tax exemption level of $11.7 million per person (or $23.4 million for a married couple) is set to expire on December 31, 2025. After that date, the exemption level is scheduled to revert to its pre-2018 level, which was $5 million per person (or $10 million for a married couple), adjusted for inflation. However, it is important to note that the exemption level could be changed before it expires through new legislation or executive action.

Why Do I Care?

For most people, this is not an issue.   But, for the baby boomer generation that quietly amassed a collection of California Real Estate holdings over the years, all those 1031 exchanges likely landed you in a place where your individual wealth exceeds (or will exceed) the $5 million exemption level that will come back into place on January 1, 2026.   Naturally, you don't plan to die in the next few years and you don't want to stick your kids and loved ones with a HUGE tax bill that will likely result in the liquidation of your real estate holdings.   Well there is some good news.

It is possible to give away your estate as a gift now under the current gift and estate tax exemption levels and potentially avoid the estate tax if you die after 2026. However, it's important to note that there are some limitations and rules that apply to these gifts.

Currently, individuals can give away up to $11.7 million in gifts during their lifetime without paying any gift tax. Any gifts above this amount are subject to a 40% tax. If you give away assets during your lifetime and your total gifts exceed the $11.7 million exemption amount, the excess amount will be subject to gift tax.

If you give away assets during your lifetime, those assets will be removed from your estate for estate tax purposes. This means that if you die after 2026, your estate may be subject to a lower estate tax because the value of your estate has been decreased by the gifts you made during your lifetime.

However, it's important to note that there are some limitations and rules that apply to these gifts. For example, gifts made within three years of your death may be subject to estate tax. Additionally, there are rules regarding the types of gifts that are exempt from gift tax, such as gifts to a spouse or to a qualified charity.

It's important to consult with a tax professional or estate planning attorney to determine the best strategy for your specific situation and to ensure that you comply with all applicable laws and regulations.