It appears quite possible that changes will be coming in the Federal estate tax and the Federal inheritance tax.
A decedent’s estate tax is paid before assets are divided and distributed to the beneficiaries. The beneficiaries pay the inheritance tax after they have received their shares of the net estate. And yes, there is double taxation occurring here. An individual estate must currently exceed $11 million in gross value before the Federal estate tax becomes an issue.
For 2020, the unified Federal gift and estate tax exemption (that is, the amount up to which no tax is owed) is $11.58 million. The tax rate on cumulative lifetime gifts above the exemption is a flat 40%. The tax rate on the estate of an individual who passes away this year with an estate valued over the $11.58 million exemption is also a flat 40%.
There are signs that the Federal exemption for estate taxes may be lowered in 2021. Meaning estates under $11.58 million—possibly a LOT less than $11.58 million—could be subject to these taxes. And by the same token, the taxation rate for inheritance taxes may be raised in 2021. So, your beneficiaries who may be subject to inheritance taxes may have to pay more than 40% in taxes on their bequest from your estate.
We strongly recommend that you review your estate plan now to see if you need to protect your estate from these possible tax changes. You really should work to reduce or avoid this double taxation, if at all possible.
If you have questions or concerns about possible changes in the Federal estate and inheritance taxes, please give us a call. We are here to help. The courts have extended electronic notarization through December 31, so act now. We can complete your estate planning all from the comforts of your home.