The federal estate tax will impact a small number of people
Let us imagine I am a local TV weatherman, and in the promos leading up to tonight’s newscast, I say “A massive storm is about to hit Alaska!” But then, when it comes to the actual newscast, I admit that the storm, while massive, will only be reaching the most westerly of the Aleutian Islands, not coming anywhere near most of the state. You would probably be more than a bit annoyed with me for wasting your time.
But on the other hand, let us say that word had gotten out that there was a massive storm coming, and people were panicking, buying everything on the shelves at the grocery stores and closing work and schools early. In that case, you probably wouldn’t mind me leading off with the news that the massive storm is not coming anywhere near us. Although you would probably expect the wording of the promo to be different.
I say this to explain why I am about to tell you about a tax which the vast majority of you will never have to pay. I have had quite a few people come to me lately, concerned because they have heard that the federal estate tax is going to become a huge issue, though the vast majority of them will never have to pay federal estate tax.
First of all, the federal estate tax is indeed a “massive storm” in the sense that it is a 40% tax. That is, obviously, a huge portion of an estate. However, it only applies to estates that are over a certain “exclusion amount”. The exclusion amount is what is about to change.
Or might change.
Let me back up. Seven years ago, Congress passed a law which doubled the exclusion amount. The amount to be excluded had been set at $5 million, with an automatic inflation adjustment each year. Doubling it meant the first $10 million was excluded, and with the inflation adjustment, for this coming year (2025) the first $14 million is excluded. So far, so good.
But they didn’t quite have the votes to make it a permanent increase. The U.S. Senate has an odd rule that unless they have a filibuster-proof majority (60 out of 100 senators) any tax bill has to be temporary, and that is defined as no more than eight years. That temporary increase expires at the very end of 2025.
So, on January 1, 2026, assuming nothing else happens between now and then, only the first $7 million is excluded from estate tax.
Given the results of the recent election, there is a very good chance Congress will extend that temporary law for another eight years, or perhaps even make it permanent. There is no guarantee, obviously, especially with the small majority in the House which might make it difficult for them to function. But with the White House, the Senate and the House in the hands of the party which passed the increase seven years ago, if I was a betting man I would put my money on it being extended.
On top of that, there are a number of things that can be done to effectively increase that exclusion even further. Amounts which are given to proper charitable organizations don’t count in the estate tax. Annual gifts don’t count as long as it is no more than $19,000 from any one person to any one other person.
And most importantly, a married couple can easily double the exclusion amount, by filing an estate tax return after the first spouse dies. So, for a married couple, it could still be a $14 million exclusion.
Yes, this could be a big deal, but only for a very small number of people, and not for another year, and only if Congress doesn’t reach an agreement. For about 99% of us, don’t worry, be happy. The storm is not going to hit you.
Kenneth Kirk is an Anchorage estate planning attorney. Nothing in this article should be taken as legal advice for a specific situation; for specific advice you should consult a professional who can take all the facts into account. Film at Eleven.
