The Imperiled Federal Estate Tax Exemption

What Is The Federal Estate Tax by Hammerle Finley Law Firm

Is dying a taxable event? According to your friendly Federal government, the answer is yes.

Let us ask a more meaningful question: is it fair that the government gets to take 40% of your hard-earned money just because you die?

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What Is The Federal Estate Tax for 2021?

We have a federal estate tax of 40%. Most people do not pay it because their estate does not exceed the federal estate tax exemption. This is the amount of assets that you can own before the tax kicks in. Everything over the exemption amount is taxed at 40% the minute after you take your last breath.

For the last several years we have been blessed. The 2021 federal estate tax exemption has been large – for 2021 the exemption is $11.7 million. That amount is per person.  For a married couple, the total amount is $23.4 million.

Very few people have an estate that big. Thus, the estate tax exemption has been off the radar for normal estate planning.

But it was not always so. In 2000, the exemption was only $675,000. Most people had to engage in expensive estate planning with complicated trusts and partnerships just to avoid the tax.

Then a series of laws were passed that gradually, but temporarily, increased the exemption.

If nothing changes, the exemption goes back to $5 million in 2026, with some escalators that should bring it to about $6.2 million.

What Tax Benefits Do You Get When You Die?

The dying thing comes with a few other tax benefits. First, the federal estate tax exemption is portable between a married couple.  That means that the exemption is not lost upon the first spouse’s death. The surviving spouse just has to timely file a 706 tax return to get that benefit.

The second benefit is a step-up in basis. When a person dies, the basis of all their assets (except qualified assets like IRAs) is stepped-up to the fair market value as of the date of death. An asset basis, of course, is the starting number for calculating a taxable capital gain. The higher the basis, the less the gain.

These are huge benefits. On top of that, we get a Texas bump. Because Texas is a community property state, the step-up applies to both the decedent’s separate property and to all a married couple’s community property. So, a married couple gets two step-ups, one at the time of the first spouse’s death and another at the time of the second spouse’s death.

Does Texas Have An Estate Tax?

Texas also does not have an estate tax. For the State of Texas, dying is not a taxable event.

Congress Wants To Change The Federal Tax Exemption

Why are we talking about this now? Because Congress spent several trillion dollars in the last year, and now they are dragging the bag for money to pay the piper. There is serious talk of cutting the exemption to $3.5 m or less and tossing the step-up.

The federal estate tax exemption and the step-up in basis are attractive targets. After all, the only people who will be taxed are dead, and dead people are a notoriously silent constituency.

You, however, know this is not about robbing the grave. It is about a tax that will cut your legacy by 40%. The tax will fall on money that you earned through hard work and smart savings, money that you intended for your family or favorite charity.

You may have an opinion on this. If you do, then now is the time to let your elected officials know your position.

Virginia will be doing a speaking event on April 7th 2-3:30pm for the Dallas Library.

Virginia Hammerle is an attorney with Hammerle Finley Law Firm whose practice includes probate law, estate planning and contested litigation. To receive her newsletter contact her at legaltalktexas@hammerle.com