The most common question in farm succession planning is, “What will happen to estate taxes with the new presidential administration?” The real answer is that no one can know for sure, but we can provide our best guess.
First, let’s explore the current federal estate tax law. For 2021, the estate tax exemption is $11.7 million per person ($23.4 million combined for married people). The current estate tax exemption is set to expire in 2026.
When Congress passed the 2017 tax legislation, it doubled the estate tax exemption for seven years. In 2026, the estate tax exemption will go back to the pre-2017 amount. The estate tax exemption in 2026 will be about $6 million.
Some history of the estate tax law is helpful when trying to predict the future. The last major federal estate tax change occurred Jan. 1, 2013. At that time, the estate tax exemption was set at $5.25 million, and the tax rate was set at 40%.
Congress decided to essentially continue the estate tax law from 2012 when the exemption was $5.12 million and the tax rate was 35%. At that time, the White House and Senate were controlled by Democrats, and the House was held by Republicans. So, the $5.25 million was a negotiated amount agreed upon by both parties.
Next, it’s important to remember that a president does not have the authority to change tax law. The Constitution expressly provides that only Congress has the power to tax. The president can obviously express his desire for tax law changes and what changes he would like to see, but ultimately he has no power to actually change tax law.
So, trying to predict changes in tax law is an exercise in congressional forecasting, which is not an enviable task for anyone.
The first few months of the Biden administration and the Democrat-controlled Congress have not seen a major emphasis on estate tax law changes. COVID-19, climate, immigration and infrastructure seem to be taking most of the time and effort of the administration.
All of these issues are complicated and will take considerable time to work out solutions and pass legislation. Therefore, it seems unlikely that any estate tax changes would take effect until at least late this year or next year.
Also, there is a very narrow margin of control in both the House and the Senate. The Democrats can lose only a few votes in the House and pass legislation, and the Senate cannot lose any. Senators who are up for reelection or are from red states may not be in a hurry to increase taxes. This is another reason that changes to the estate tax law may not happen anytime soon, if at all.
Lastly, if Democrats decide to change the estate tax law, a possibility could be to just move the 2026 decrease up a few years. The estate tax exemption is already scheduled to be reduced by one-half in five years. The Democrats could decide to cause the reduction to happen a few years early and call it a victory. This strategy would prevent the estate tax exemption from being reduced to below $5 million.
Predicting changes in tax law is never easy, and with the current political environment, it’s even more challenging. The best practice is to stay informed and be ready to react to any significant changes.
Moore is an attorney with Wright & Moore Law Co. LPA. Contact him at 740-990-0751 or firstname.lastname@example.org.