Trusts and estates lawyers focus on estate tax exemption

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By Bennett Loudon

For trusts and estates professionals, the big question is what will happen to the estate tax exemption with President Donald J. Trump back in the White House?

“Everything else is all minor stuff,” said Christopher Desimone of Anderson, Desimone & Green in Roanoke, Virginia.

According to Graham Leonard, a partner at Harter, Secret & Emery in Rochester, New York, from the T&E perspective, “This is the big one.”

“Trump and Congress are operating at the federal level,” Leonard said. “And really the major set of federal laws that apply to T&E are just tax. Otherwise, T&E are governed by state law.”

Currently, the federal estate tax exemption is $13.6 million for an individual and about $27.2 million for a couple. Because the exemption is adjusted for inflation, the threshold is expected to increase to about $13.9 million per individual in 2025.

The estate tax brackets range from 18% for the first $10,000 above the exempt amount, up to 40% for anything more than $1 million above the exemption.

Key legislation

The increased exemption amount is part of the 2017 Tax Cuts and Jobs Act. After the temporary increase expires Dec. 31, 2025, if no action is taken, the exemption will revert to an inflation-adjusted amount of about $7 million.

“I’m willing to go out on a limb and say the sunset that everybody has been expecting to happen at the end of 2025 is not going to happen,” said Katherine E. Ramsey, a partner at Virginia Estate & Trust Law, in Richmond, Virginia.

“They’ve got to address taxes in 2025,” Ramsey added. “This is such a big deal to a lot of people that they’re going to extend it. I can’t imagine they would do otherwise.”

The federal estate tax affects only the very wealthiest families in the United States.

According to the Urban-Brookings Tax Policy Center, only about 3,500 taxable estate tax returns were filed in 2021, with a total liability of $19.2 billion.

The estimated number of taxable estate returns for 2022 was 3,900, with a tax liability of $22.7 billion. There were 4,000 taxable estate returns in 2023 with $24 billion in liability, according to Urban-Brookings.

“Most, if not all practitioners and commentators, think it is very likely that the estate tax exemption amount or the increased exemption will be continued,” Leonard said.

But it’s unlikely that any action will be taken on the issue before summer.

There also is a possibility that, to achieve a different tax policy, the estate tax exemption might be allowed to revert to the pre-Tax Cuts and Jobs Act level to accomplish a different budget or deficit target.

When the Tax Cuts and Jobs Act was enacted in 2017, T&E professionals started making plans for clients to take advantage of the increased estate tax exemption before it expires.

Myles B. Fischer of the Albany, New York, office of Harris Beach, pointed out that when the Tax Cuts and Jobs Act was enacted, Republicans controlled the White House and both houses of Congress, but it still took more than a year to accomplish.

Fischer believes that the increased exemption might be allowed to expire, but it will eventually get reinstated retroactively.

Linked benefits

The estate tax exemption and the gift tax exemption are linked, so many taxpayers have been able to lock in the higher exemption limit by transferring assets as gifts. Trusts and estates lawyers have been advising clients to move assets outside their estate now by gifting the wealth to their children and others.

“Clients that are high net worth, or ultra-high net worth, that have the ability and are able to make these large gifts … should still consider doing so — and consider doing so sooner rather than later,” Fischer said.

“What I’d want the main takeaway to be as a practitioner is that we know it’s possible to lock in this current increase and exemption by making gifts of up to the exemption amount presently during someone’s lifetime,” Leonard said.

Leonard recommends clients consult with advisers to discuss what the plan might look like should the exemption not be increased.

“We know President Trump and the congressional Republicans want to extend this, so if they get what they want the current increase in the estate tax exemption will be continued,” he said.

But if it’s not extended for some reason, and the exemption amount drops back to pre-Tax Cuts and Jobs Act level, “There’s going to be a big rush to try to do this type of planning,” Leonard said.

The impact of Trump’s reelection, Desimone said, was many people felt it urgent to transfer their money in anticipation of a decrease in the exemption.

“Now they don’t feel the need as much to do so with Trump being elected because they’re confident the exemption will not be increased or will not decline,” he said. “The IRS came out and said that if you make [gift] transfers before the exemption changes, they’ll grandfather it in just in case the exemption goes down, but you’ve given more than that away.”

Ramsey not only expects an extension of the higher exemption amount, but potentially a push for a total repeal of the estate tax.

“That’s been something they’ve been trying to do for 20-some years or more. It came close to doing it back in 2005,” she said,

“I’m not saying that I’m advising clients to bet on that. I think it’s more likely change at the end of 2025 is not going to happen so we will continue to have high exemptions,” Ramsey said.