The Biden administration has promised to lower the Unified Credit for Estate taxes from $11.7 million to $3.5 million, and the credit for gift taxes to $1 million. The question on many planner’s minds is whether Congress has the political will to make those changes retroactive: that is apply them to all gifts and estates in 2021, not just the ones happening after the changes are passed. Some commentators predict that there is not the political will to make the changes retroactive, and they may be right. However, the changes to the estate tax will apply retroactively to 2021 gifts, even if the legislation does not specifically state that it is retroactive. Here is why and what you can do about it.
Some describe the $11.7 million as an exclusion from estate or gift tax when it really is not – it is a credit against estate and gift tax applied under IRC section 2505. Specifically, the credit against gift tax for a gift made any time in 2021 is the same as the credit against estate taxes, as if the donor died on the last day of 2021. Financially, the implications of this are, if you gifted the full $11.7 million in June of 2021, and Congress lowers the estate tax credit to $3.5 million on October 1, 2021, the tax credit for the gift in June 2021 is now taxed retroactively at the new rate of $3.5 million credit rather than on the previous $11.7 million credit.