The Tax Cuts and Jobs Act of 2017 brought in an increase to the lifetime exemption which is currently at $11.7 million per person for 2021. This exemption amounts are scheduled to sunset at the end of 2025, however under the Biden administration the change may come a lot sooner. We could see the exemption go back to pre-2018 levels of $5.5 million, but potentially could even be much lower at $3.5 million per person.
The main question here should these proposed changes come into place is, will they be retroactive? As the exemption works as a tax credit against estate and gift tax rather than an exemption this is likely to be the case, and the changes could come into place this year. It therefore important to discuss any potential gifts made in 2021 and what the possible changes could mean for you. There are ways to potentially mitigate the risk should the retroactive legislation come into force such as QTIP marital trust which allows you to make a Qualified Terminable Interest Property election at a later date if necessary, or setting up a trust with a formula allocation clause. This type of tax planning can be complicated and it is good to understand the impact of all options before making any decisions.