Know the Law: Estate Planning Before Year-End

Caitlin McCurdy Headshot
Caitlin G. McCurdy
Director, Trusts & Estates Department
Published: Union Leader
October 11, 2020

Q: With the 2020 election quickly approaching, I have seen various articles and commentary on people wanting to make gifts or engage in estate tax planning before the end of the year. How do I know whether this is something that impacts me?

A: This is a timely question. Federal law provides that an individual can transfer assets free of estate and gift tax as long as the transfers are under a certain amount, called the applicable exclusion amount. In 2020, this amount is $11.58 million per person.

Additionally, the rules allow for “portability,” which means a married couple can combine their individual applicable exclusion amounts and are thus not subject to a federal estate or gift tax unless their combined lifetime gifts or assets exceed $23.16 million. Only assets in excess of the applicable exclusion amount in effect at the time a person passes away are subject to federal estate tax, which is currently set at 40%.

The current applicable exclusion amount will sunset in 2025 and automatically reduce to $5 million per person, indexed for inflation. Some commentators suggest that, depending on the outcome of the election, Congress may act to lower the applicable exclusion amount before 2025. If Congress acted early next year, the change could be retroactive to Jan. 1, 2021.

Accordingly, many people are concerned they may have a taxable estate under a lower exclusion amount and are making gifts before Dec. 31, 2020. This strategy allows individuals to use their “extra” applicable exclusion amount now, when the applicable exclusion amount is historically high. Notably, the IRS has issued anti-claw-back regulations stating that gifts made while the current exclusion amount is in effect will still be honored and not “clawed back” into the estate if a person passes away when the amount is lower.

If you think you should be doing planning before the end of the year, then there are many gifting strategies that can be employed to maximize flexibility and yet make a completed gift and use your applicable exclusion amount. This analysis is specific to each person and family and should be undertaken with your estate planning goals and core capital needs in mind.

(Please note, this answer is only addressing the federal estate and gift tax laws. New Hampshire does not have a state estate or gift tax, but other New England states do. Massachusetts, for example, imposes a state estate tax on estates over $1 million.)

Know the Law is a bi-weekly column sponsored by McLane Middleton, Professional Association. We invite your questions of business law. Questions and ideas for future columns should be addressed to: McLane Middleton, 900 Elm Street, Manchester, NH 03101 or emailed to Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.