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Today, it’s hard to believe that in 1997 you could only exempt $600,000 from estate taxes. When a person died, heirs would pay tax on anything above $600,000 at the (then) maximum 55% tax rate. The estate situation is very different today. The Internal Revenue Service just announced that for anyone dying in 2021, the inflation-indexed exemption would be $11,700,000 per person. Any unused amount from the first spouse to die can be used later by the surviving spouse. Also, the maximum estate tax on amounts above that threshold has dropped to a 40% rate.


The Tax Policy Center estimates that only about 0.1% of the estimated 2.7 million people expected to die in the coming year will have to pay any estate taxes at all. There has never been a year when the government has reduced the estate tax exemption in the history of estate taxes.



Changes to the estate exemption


All of that could end in four years unless Congress passes an extension. The current exemption sunsets at the end of 2025, at which point the exemption would automatically drop back to what it was before 2018—back to $5 million indexed to inflation. We may not have to wait that long. President-elect Joe Biden’s tax plan calls for reducing the estate tax exemption amount to $3.5 million. The plan would also increase the top rate for the estate tax to 45%.



How the Biden plan would change the estate exemption


The Biden plan would dramatically reduce the exemption. This change would pull a lot more people into estate tax territory. It is uncertain the measure would pass in its current form, and it seems unlikely that it would affect the 2021 tax year. But the prospect of a change has set people talking to their financial advisors about gifting to heirs under today’s very generous exemption, under the (reasonable) assumption that there would be no walk-back for any actions taken under current tax law. Besides, families can put several relatively complicated estate tax strategies into place, which allow them to keep control of their assets if needed in retirement. At the same time, heirs receive increases in value tax-free. Tax experts are quietly telling their clients to plan now rather than later.



Planning for the estate exemption or possible changes



Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route.


Discover. Where are you and where do you want to be?

During our meeting, we discuss your goals and concerns before we start gathering data. The financial facts and figures are important, but it’s not the whole story. We learn about your values and dreams, as well as what keeps you up at night, so that we can serve you better.


Create. How can you get to where you want to be?

We develop a customized financial plan that shows where you are in relation to where you want to be. We present different scenarios that show the impact of your options so you can choose how to accomplish your goals in a way that is meaningful to you and how you want to live your life. We also stress test the scenarios to see how your plan will hold up to challenges like lower returns or higher inflation.


Execution. What are you willing to do to get there?

A plan has no value if it’s not implemented. You choose the scenarios and options that are right for you, and we act as your accountability partner to ensure the plan is implemented. We break the actions into manageable steps and help you prioritize so you’re not overwhelmed.  We also work with your attorneys, accountants, and other professionals as needed.


Monitor. What happens when life happens to your plan?

We stay engaged with you because life happens, both good and bad. Fluctuating markets, career changes, liquidity events, changes in the laws, and health concerns can impact your plans. Ongoing proactive planning can keep you on track toward your


If you’d like to see some financial plan scenarios for your retirement or estate planning, please give us a call at 619-255-9554.

We would love to explore your possibilities with you.


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