Biden's Latest Estate Tax Exemption Proposal

The latest word from the Biden administration is that the estate tax exemption will be reduced, effective January 1, 2022, from the current 11.7 million per person enacted by the Trump administration in 2017, to the previous Federal limit of 5 million, adjusted for inflation. This is the same amount as the New York exemption, which was based on the previous Federal 5 million dollar limit and not affected by the Trump increase. The New York and Federal exemption will likely then be the same in 2022 -- about 6.2 million.

What is included in your estate for estate tax purposes? Just about any asset you can think of -- real estate, bank accounts, investments, retirement accounts and the death benefit on any life insurance you own.

Federal and state estate tax rules have one key difference. Federally, if a spouse dies without using their exemption (such as by leaving it to a trust for the benefit of their surviving spouse for their lifetime and then on to the heirs), then the surviving spouse may take advantage of the unused portion of the deceased spouse's exemption. For example, a couple has 10 million in assets. Husband dies and leaves all to his wife. In this case, he has used none of his exemption. However, on wife's death she will have his 6.2 million exemption as well as her 6.2 million exemption (adjusted for inflation). This is called "portability" in the sense that you can move one spouse's exemption to the other spouse.

New York, however lacks "portability" so that if husband dies leaving everything to his wife, on her death she will only have her 6.2 million exemption (adjusted for inflation). On an estate of that size, New York taxes may easily reach one million or more. In New York it is advisable, as mentioned above, for husband to leave his estate to a "credit-shelter" trust for the use of his wife during her lifetime and then on to the heirs after she passes. These assets will be considered as having passed from him to the children and will not be included in her estate.

As stated recently on Forbes.com "Taxpayers should act immediately to endeavor to use the exemption before it declines by half".