This article, written by attorneys Bradford Cook and Madeline Hutchings, was originally published by the NHBR and can be found here.
Since November, Americans have looked for answers about what President Donald Trump’s victory and the composition of Congress means for their personal tax liability and estate planning. For many, these changes in control of the White House and Congress can have major implications for long-range financial planning, particularly with regard to the federal estate tax.
The federal estate tax exemption under the first Trump tax cut, known as the Tax Cuts and Jobs Act (TCJA), has, for many years, shielded all but a small percentage of estates from tax. (The State of New Hampshire imposes no estate tax on its residents, but Granite Staters are still subject to federal tax.) Currently, the TCJA provides an estate tax exemption, called the “personal tax credit,” of nearly $14 million per person ($28 million per married couple), meaning that only property over those amounts is subject to estate tax. A taxpayer’s estate may pass any unused exemption amount to the taxpayer’s surviving spouse, resulting in the $28 million being untaxed. The portion of an estate in excess of that amount is taxed at 40% in most cases.
The $14 million amount of the tax credit is scheduled to sunset on December 31, 2025. If the sunset proceeds as scheduled, the estate tax exemption amount would be approximately halved: The exact amount will depend on knowing the 2025 rate of inflation, but tax professionals anticipate that the untaxed amount would be reduced to around $7 million for an individual, or a combined $14 million for a couple. As a result, a significantly greater number of New Hampshire estates would become subject to federal taxation. For many taxpayers and planning professionals, the sunset was considered a given, until November.
The outlook for federal estate tax is now in question. While a total repeal of the estate tax may be unlikely, many speculate that a Republican Congress will at least extend the current level. President Trump has requested that. Given this speculation, taxpayers are left wondering whether they no longer need to plan for a lower exemption amount. If the sunset was going to make your estate subject to tax, can you now stop worrying about estate tax planning?
Taking this approach would probably be a mistake. Maintaining the current tax credit level would benefit certain wealthy taxpayers (or, more accurately, the beneficiaries of their estates). But federal leadership may find it more important to uphold campaign promises, such as tax breaks on overtime, tips, and Social Security, cutting the deficit, etc. These promises would need to be funded from somewhere. And letting the estate tax sunset will require no legislative action, since it is already written into the TCJA.
The sunset may happen as scheduled, so at the very least create a backup plan. This way, you do not run out of time for adequate planning. Adopt an approach by which you can prepare to lock in the exemption, but later avoid or undo this path if the current exemption amount is extended. There are a number of strategies wealthy taxpayers can employ that take advantage of the higher tax credit amounts, and which can be put in place and ready for implementation if no extension passes later this year. (If the sunset occurs as planned, then the end of 2025 will be a very busy time for many professional advisers.)
There are several strategies with built-in flexibility, to handle the current uncertainty in tax law. The best planning approach for each taxpayer depends on a careful analysis of financial position and goals. Consult with your planning professionals about which strategies work best for you, so that you can be prepared without needing to predict the future.