The estate tax exemption is the amount a deceased individual can pass to beneficiaries and heirs free of estate taxes. Any assets in excess of the estate tax exemption are subject to estate taxes as the estate tax rates in effect as of the date of the decedent’s death.

Current Federal Estate Tax Exemption

The current Federal Estate Tax Exemption for 2021 is $11.7 million per individual. The tax rate on funds in excess of the exemption amount is 40%. (See below for a chart of historical Federal estate tax exemption amounts and tax rates.)

Future Changes Expected for the Federal Estate Tax Exemption

The current estate tax laws expire automatically at the end of 2025 and will revert back to the pre-2018 amounts (i.e., $5 million adjusted for inflation from 2010 forward and 40% tax rate). However, these laws are always subject to change by new laws passed by Congress.

The Biden Administration has signaled it’s intent to make drastic changes to the estate tax, gift tax, and capital gains tax code. Thus, high net worth individuals are highly encouraged to seek out tax planning opportunities under the current tax laws to “lock in” as much potential tax benefits as possible before the tax laws change.

North Carolina Estate Tax Exemption

North Carolina repealed the state-level estate tax in July 2013, effective retroactively for deaths occuring on January 1, 2013 or later. Thus, for deaths occurring on January 1, 2013 or later, only the Federal estate tax rules apply for North Carolina decedents.

Estate Taxes for Married Couples & Portability

Beginning in 2010, the Federal tax code was modified to add “portability” provisions for married couples, meaning, that upon the first spouse’s death, his or her unusued estate tax exemption could be claimed by the surviving spouse. While this is a helpful tool for married couples that did not address estate tax planning prior to death, it has the downside of requiring the surviving spouse to file an estate tax return. In our experience, most individuals are not aware of this requirement and thus, often miss out on the portability election. We highly recommend married couples address estate tax planning within their estate plans so they are not dependent on the portability election or having to file an estate tax return after the first spouse’s death.

Estate Tax and Gift Tax Are Linked

Keep in mind that the Estate Tax Exemption and the Lifetime Gift Tax Exemption are linked together. Any portion of your Lifetime Gift Tax Exemption used will reduce your available Estate Tax Exemption upon death. For example, if you use $2M of your lifetime gift tax exclusion during your lifetime, then upon death your estate tax exemption amount will be reduced by $2M.

Estate Tax & Generation-Skipping Transfer Tax (GST Tax)

When the estate tax was first created, many affluent families (e.g., the Rockefellers, Vanderbilts, etc.) began using trusts to shelter assets from estate taxes for multiple generations by setting up their estate plans such that some assets would “skip” their children and pass directly to grandchildren or younger beneficiaries.  Here’s how it would work: Grandpa realizes that then he leaves his estate to his children, it will be subject to estate tax. And then later, when Grandpa’s children die and pass the wealth down to the grandchildren, it will be subject to estate tax again (as part of the child’s estate). So Grandpa decides that he has enough wealth that he will just leave part of his estate to his children, and then for the rest of his estate he’ll “skip” his children and leave it directly to the grandchildren, thereby sheltering the money from being taxed as part of the child’s estate.

Congress eventually got tired of these generation-skipping shenanigans and added the Generation-Skipping Transfer Tax to the law books. Essentially, if you leave assets to grandchildren or younger beneficiaries in an effort to “skip” a generation of estate taxes, there is a secondary tax that kicks in to make it as if you had paid estate tax at each generation.

The Federal generation-skipping transfer tax (GST Tax) exemption is currently the same as the estate tax exemption.

Federal Estate Tax Exemption Historical Chart

Year

Estate Tax Exemption

Estate Tax Rate

2021

$11,700,000

40%

2020

$11,580,000

40%

2019

$11,400,000

40%

2018

$11,180,000

40%

2017

$5,490,000

40%

2016

$5.450,000

40%

2015

$5,430,000

40%

2014

$5,340,000

40%

2013

$5,250,000

40%

2012

$5,120,000

35%

2011

$5,000,000

35%

2010

$5,000,000 or $0*

35% or 0%*

2009

$3,500,000

45%

2008

$2,000,000

45%

2007

$2,000,000

45%

2006

$2,000,000

46%

2005

$1,500,000

47%

2004

$1,500,000

48%

2003

$1,000,000

49%

2002

$1,000,000

50%

2001

$675,000

55%

2000

$675,000

55%

1999

$650,000

55%

1998

$625,000

55%

1997

$600,000

55%

Need to Discuss Your Tax & Asset Protection Planning?

In our years of experience working with thousands of individuals in the Wake County area, we find that asset protection planning is particularly important if any of the following apply:

  • You own a home and have an estimated net worth of $1M or more;
  • You own vacation property;
  • You own rental property;
  • You are high income-earning professionals;
  • You are high income-earning business owners;
  • You own a business with significant value.

Don’t leave yourself or your loved ones stuck dealing with the financial aftermath of avoidable taxes, a lawsuit, long-term care costs, or an unexpected tragedy can bring to your family. Contact Carolina Family Estate Planning today at (919) 443-3035 or fill out our online form to speak with someone about registering for a seminar or a Vision Meeting. You may also wish request a free copy Jackie Bedard’s book, Estate Planning Pitfalls: The Twelve Most Common Threats To Your Estate & Your Family’s Future.

 

Jackie Bedard
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Attorney, Author, and Founder of Carolina Family Estate Planning