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  • Writer's pictureJenny Rozelle, Host of Legal Tea

Current Trends - Estate Tax Update, 2023 - Episode 116


Hey there, Legal Tea Listeners –This is your host, Jenny Rozelle. Welcome back for another Legal Tea episode today, episode one hundred and sixteem! Today’s topic is a current trend … on this type of episode, we dive into something going on in the current time or that I’ve stumbled across on the news or social media, that is pertinent to my little estate and elder law world. Well, today’s episode may not be everybody’s cup of tea – yes, pun very much intended – but today, we’re going to be talking about … taxes. Womp, womp. I know. It’s not a sexy topic. It’s not a fun topic. But I’ve thought many times about doing an episode on how the estate tax exemption is supposed to sunset (or decrease) at the end of 2025, and I think I’d be doing you all, my Legal Tea Listeners, a disservice if I didn’t put out at least one episode, some content about this topic … because it’s super, super relevant to my estate and elder law world. I just know taxes aren’t always a blast to talk about, so let’s see if I can make it informative and fun! I’m up for the challenge!

Before we even get started on the specific topic, I think it’s incredibly important to get crystal clear on WHAT the estate tax even is and I say this because so many get the types of taxes confused. Super generally speaking, there are two types of taxes that are pertinent to my little estate world when someone passes away – 1) inheritance tax and 2) estate tax. For any of my Legal Tea Listeners in Indiana, I have good news for you! Indiana repealed our inheritance tax, so it’s a non-issue to us. So, you can zone out for a quick second. One of the biggest differences between inheritance tax and estate tax is WHO gets taxed when it’s pertinent? With inheritance tax, the BENEFICIARY receiving the inheritance is “who” is taxed while with estate tax, the ESTATE of the DECEASED PERSON gets taxed BEFORE the distributions are made to the beneficiary. Let me say that again just to make it clear: With inheritance tax, the BENEFICIARY receiving the inheritance is “who” is taxed while with estate tax, the ESTATE of the DECEASED PERSON gets taxed BEFORE the distributions are made to the beneficiary.

Now, here in my state of Indiana, like I said, they repealed the inheritance tax, but there are a small number of states that DO still have an inheritance tax according to Nerd Wallet (which the article is linked in the source links for this episode), so be mindful of that if you are any of the following states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. To confirm or to clarify, there is no FEDERAL inheritance tax – just state. And interestingly, that number of states (that still has inheritance tax) seems to decrease as time passes. The NerdWallet article actually mentions that Iowa, specifically, passed a bill a couple years ago to begin phasing out their state inheritance tax and it will be completely eliminated for deaths beginning in 2025. Lastly, before I shift to estate tax, I also think it’s pertinent to bring up “income tax” in relation to inheritance tax and here’s why – if you inherit an account that is pre-tax dollars, say like a Traditional IRA, 401K, 403B, etc., and you start taking distributions out of those types of account as a beneficiary, you WILL be taxed on it, but that’s an INCOME TAX not an inheritance tax. So, just FYI.

Shifting to estate tax, again this is the tax that happens on the ESTATE of the DECEASED PERSON before the beneficiary gets their inheritance, there IS a FEDERAL estate tax and even some states have state estate tax. Confusing, right? Well, some cynics may say that’s intentional – the states that have state estate tax is a short list: state of Washington, Oregon, Minnesota, Illinois, New York, Vermont, Connecticut, Massachusetts, Rhode Island, Maryland, and Maine (If you’re paying super close attention to this episode, Maryland is the only state that has a state inheritance tax and state estate tax!) Anyway, so those states have a state estate tax – but there’s also a FEDERAL estate tax that is pertinent to all of us. The difference is really just who gets the money – if it’s a state tax, the state gets it; if it’s a federal tax, the feds get it. So yeah, there’s a FEDERAL estate tax that we all have to be mindful of.

Currently, in 2023, the FEDERAL estate tax exclusion amount is $12.92 Million Dollars per person – so as a married couple, you actually get two of those. As a married couple, you get $25.84 Million Dollars. What does that actually mean? That means that estates that have LESS THAN that amount ($12.92 individual, $25.84 couple), there is not an estate tax imposed on your estate when you die. However, if your estate exceeds that amount, first of all, would you like to adopt me? And second of all, the amount of assets that EXCEED that amount are taxed at a fairly ungenerous rate ranging from 18%-40%. Something to be mindful of, though, is that of those states I named that have state estate tax, if their state exclusion amount is higher or lower, you may be subject to state estate tax and federal estate tax – or just one. Like, the NerdWallet article notes that some of the state estate tax exclusion amounts are much lower, meaning it’s more pertinent to people that have less than those millions of dollars that I referenced. Just something to be mindful of!

So, that’s where we stand currently; this episode, though, referred earlier to how the FEDERAL estate tax exemption is supposed to sunset (or decrease) at the end of 2025. That’s what is currently on the books supposed to happen. So, to give you a little context, here’s the quick scoop – in 2017, the Tax Cuts and Jobs Act passed and through that, the federal estate tax exclusion amount increased from $5Million-ish to $10Million-ish (which over time, has been adjusted to inflation). So, just to give you an idea what happened, here’s a year-by-year (starting in 2017) snapshot of the federal estate tax exclusion amount:

2017: 5.49 Million Per Person 2018: 11.18 Million Per Person 2019: 11.4 Million Per Person 2020: 11.58 Million Per Person 2021: 11.7 Million Per Person 2022: 12.06 Million Per Person: 2023: 12.92 Million Per Person

So yeah, you can see how it jumped in 2017, thanks to the Tax Cuts and Jobs Act. Though, here’s the kicker! It is a temporary thing because there’s something called a “sunset provision” as part of it. What does that mean? Well, without further action from Congress, the federal estate tax exclusion amount will go back to pre-Tax Cuts and Job Act, but yet adjusted for inflation, which depending on the source, would take us to somewhere between $6-7 Million Per Person (so somewhere $12-14 Million as a married couple).

So, there’s a couple thoughts on this whole topic – first, if you’re listening and your estate may be impacted by this, there are ways, there are tools that you can start implementing NOW in case they do let the estate tax exemption sunset – you really should start acting now. Any solid estate planning attorney that is skilled in the high net worth space is going to start very soon, if not already, getting busy with addressing this possible sunset. So, hear me loud and clear, start getting in touch with your professional team NOW because if you wait much longer, the best ones will be spoken for. I promise you! And if you need a solid resource in your area, shoot me an email (LegalTeaPodcast@gmail.com) and I’ll get you names that will take excellent care of you!

A second thought on this whole topic is whether there will be action by Congress. So, a second ago I said, “without further action from Congress, the federal estate tax exclusion amount will go back to pre-Tax Cuts and Job Act…” … and what do I mean by “without further action from Congress?” Well, what I mean is that Congress COULD alter the path that this is heading. Congress could swoop in and say, “Nope – let’s not this sunset at the end of 2025. Let’s keep ‘er going!” Now, if you ask 10 different professionals (who are in the tax and estate space) whether they think Congress will let it sunset or not, I bet you’ll find we’re rather equally divided. Some think that it’s dependent on who is the White House and Congress – some think that it will “absolutely” sunset – some say “no, they’ll definitely keep it really high” – some are like, “What are you talking about?” (If that’s the case, maybe find a different accountant or estate attorney … seriously though…)

In my twelve year career so far, something I’ve learning in the estate space is not to react too dramatically. There have been so many times that the news is saying XYZ and really, XYZ doesn’t happen at all. I operate by “What does the law CURRENTLY say?” and go from there. The law CURRENTLY states it is supposed to sunset, so if your estate so happens to be in the millions like that, start planning now. Start acting now. You basically have a little more than a year. Time flies, so get your act together and rally the troops. You need a solid plan. And, you know what? Don’t sweat whether Congress is going to take action – if they do and they leave it high, then if you’ve done planning, as I suggest, you are set for if the exclusion amount comes back down … even if they do say to keep it, would they keep it forever? We don’t know! And if they don’t (as in Congress doesn’t take action), you will SURE be thankful you got your rear into gear to get a plan in place.

To me, it’s all about assessing your risk. There’s far more risk (and significant dollars on the line … YOUR dollars!) to NOT get a plan together than to get a plan together … and “Oh! Congress took action!” My personal opinion is that IF they do (which I go back-and-forth on whether I actually think they’ll let it sunset or not), anyway, if they do take action, I think it’ll be in the absolute 11th hour. That’s just how the seem to roll, right? So, if they do, we won’t know until it’s too late to actually get a plan together or not. So, if you agree (that they often wait until the 11th hour), you’re basically left with a risk assessment – get a plan together now or not. And I hope this episode has equipped you with information in order to be able to make the best decision for yourself.

Alrighty, I’m out of time, friends, so let’s wrap this episode up – next week, we’re back to the “celebrity estate planning” type of episode – and during that episode, we are going to dive into what happened estate-wise following the passing of a former Supreme Court Justice of the United States – Chief Justice Warren Burger. Now, I know this “celebrity” is not a popular name or anything but his estate left a lot to learn from – and it’s actually a nice follow-up to this episode on estate taxes. Anyway, we will dive into that next Tuesday, Legal Tea Listeners! Talk to you then and stay well!


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