Although the dust has not fully settled yet on the 2022 midterm elections, all signs point to divided government for at least the next two years.  With divided government, the odds of any meaningful changes to the federal estate/gift/generation-skipping transfer tax exemptions drops dramatically.  Unlike in 2020 and 2021, therefore, the concerns of a drop in the exemptions ahead of the one scheduled to occur after calendar year 2025 are extremely low.  Although tax changes are always possible, the current environment suggests that we will continue to have the high exemptions for at least the next two years.

As for what happens after?  We still have another election cycle to get through and a lot can change, but your author submits that any significant change would require a sweep of both houses and the presidency by the Democrats – and perhaps a very left-leaning sweep of all three — to see an early drop in exemption.  But spending whatever political capital might be required to accomplish that seems inefficient given that the exemptions are scheduled to drop anyway on January 1, 2026.  If the left-blowing winds are particularly strong, perhaps efforts to drop the exemption to $3.5 Million – something that Democrats have suggested is their preference/objective since the Obama years — could emerge.  But that does not seem probable.

But what if things go the other way and we end up with a very right-leaning, Republican sweep in 2024?  I still see extending the $10 Million plus inflation exemption as difficult to achieve.  With the justification for the increase in exemptions in 2001, 2010, 2012/13, and 2017 centering on family farms and closely-held businesses, the Republican “cost” to pushing an extension of the higher exemptions seems exceedingly high.  It will become increasingly difficult to say a $15 Million or higher exemption – or $30 Million or higher when two spouses’ exemptions are aggregated — is benefitting the “little guy.”

We, and others in the legal, accounting and financial services industries will be watching these matters closely.  While the above analysis suggests that there is no hurry to plan for the next couple of years, experience also shows that taking advantage of extra time leads to better decision making and better outcomes.  So if the drop in exemption is likely or potentially impactful for you and your family, you are encouraged to stay ahead of whatever political and tax law changes might be ahead.

To discuss these and related matters, please contact your Certus attorney or the author, Mark A. Shiller.