The estate tax is a tax on your right to transfer property at your death. The estate tax is computed based on the value of everything you own or have an interest in at the time of your death. In contrast, the federal gift tax is payable if you give someone money or property during your life.

The Internal Revenue Service (IRS) recently announced the estate and gift tax limits for 2021. The estate and gift tax exemption is $11.7 million per person, increased from $11.58 million in 2020. As a result of the increase, an individual could leave $11.7 million to heirs and pay no federal estate or gift tax, while a married couple could shield double that amount, or $23.4 million.

Importantly, the $23.4 million exemption per couple isn’t automatic. An unlimited marital deduction allows you to leave all or part of your assets to your surviving spouse free of federal estate tax. Thereafter, you can use your late spouse’s remaining unused exempt amount to offset estate taxes due upon your death. However, to use your late spouse’s remaining unused exemption, you must elect it on the estate tax return of the first spouse to die, even when no tax is due as a result of the death. If you don’t elect to use your deceased spouse’s unused exemption, you could receive an unexpected federal estate tax bill (but only if your estate exceeds the exempt amount for an individual in the year of death).

The annual gift exclusion amount for 2021 stays the same at $15,000. That means you can give away $15,000 to as many individuals—your children, grandchildren, and their spouses—as you’d like with no federal gift tax due and no requirement that you file a federal gift tax return. A husband and wife can each make $15,000 gifts, doubling to $30,000 which a married couple can gift while remaining exempt from federal gift taxes  In addition, you can make unlimited direct payments for medical and tuition expenses.

Congress increased the federal estate and gift tax exempt amount for tax-years 2018 through 2025. However, under the tax reform law, the increase is only temporary. Thus, in 2026, the exempt amount is due to revert to its pre-2018 level of $5 million, adjusted for inflation.

On November 20, 2018, the IRS clarified that individuals taking advantage of the increased estate and gift tax exclusion amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels. As a result, people planning to make large gifts between 2018 and 2025 can do so without being concerned that they will lose the tax benefit of the higher exclusion amount once it decreases. For example, assume that A makes a taxable gift of $9 million in 2018 when the estate and gift tax exemption is $11.17 million. A uses $9 million of the available estate and gift tax exemption to reduce the gift tax to zero.  A dies in 2026.  Even if the estate and gift tax exemption is lower that year, A’s estate can still base its estate tax calculation on the higher estate and gift tax exempt amount that was in effect in 2018.

As to state estate and gift taxes, New Jersey never imposed a tax on gifts made by residents. In addition, the New Jersey estate tax was eliminated in 2018.

IRS Rev. Proc. 2020-45 containing the new estate and gift tax limits for 2021 is attached here –

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Estate Planning and Administration