New Tax Proposals Mean Some Should Review Their Estate Plans

As we have written previously, a number of tax proposals being considered in Congress could significantly affect gifting and estate plans for those with larger estates -- over $3.5 million. If you're in that category, you might want to meet with your estate planner to take advantage of gifting opportunities that are available under the current law. 

Under Vermont senator Bernie Sanders’ For the 99.5 Percent Act, the estate tax exemption would be reduced from $11.7 million for individuals and $23.4 million for couples to $3.5 million for individuals and $7 million for couples. Any estate that is valued at under the exemption amount will not pay any federal estate taxes, while those exceeding the exemption threshold would be subject to a progressively increasing tax rate that starts at 45 percent. The Act would also slash the lifetime gift tax exemption from $11.7 million to $1 million, although individuals would still be able to give away $15,000 a year without the gift counting toward the lifetime limit. 

Another proposal in the Senate is the Sensible Tax and Equity Promotion (STEP) Act, which would eliminate the step-up in basis that beneficiaries receive when they inherit property. The proposal would require an estate to pay tax on all previously untaxed gains. This means that if an estate includes property that has increased in value, the estate would have to pay taxes on that increase. However, the Act would allow the first $1 million of appreciated assets to pass without taxation. In addition, families that inherit a farm or business would be able to pay the tax in installments over a 15-year period. Any taxes paid under the bill would be deductible from the estate tax.

President Biden has also introduced his tax proposals, which include an increase of the capital gains tax rate to 40 percent. This would apply only to income over $1 million. Biden’s proposal also contains a similar elimination of the step up in basis as the STEP Act. In addition, the proposal targets dynasty trusts. The income that has appreciated in a dynasty trust may be subject to capital gains if it hasn’t been subject to recognition in the past 90 years. There would also be no valuation discounts when calculating capital gains. 

It isn’t clear which if any of these proposals will make it all the way through Congress and get signed into law, but with Democrats in control of both houses of Congress and the presidency, some changes are likely. It is difficult to plan given such uncertainty, but the following are some options to talk to your attorney about before any of these proposals become law: 

  • Maximize the use of available exemptions by transferring assets into a trust before the end of the year. There are a number of different types of trusts that might be beneficial, including a spousal lifetime access trust (SLAT). Don’t forget about the generation-skipping transfer tax exemption, which allows you to transfer funds to a trust that benefits grandchildren. 
  • Consider including charities in your estate plan. A charitable remainder trust allows you to provide yourself and your spouse income during your lifetime and leave the remainder to a charity. Profits from the trust are not subject to capital gains taxes and the trust can help reduce your taxable estate. 
  • Include a disclaimer in any trust you may have that would change provisions if there are changes to the tax code. To be effective, the disclaimer has to be carefully crafted. 
  • To avoid paying capital gains taxes on appreciated assets, consider borrowing money and putting it into a trust instead. 
  • Consider giving away a fractional interest in property before the end of the year and any valuation discounts may be eliminated. 
  • Make sure you have enough liquidity in your estate to pay any possible taxes that are due. You can do this using life insurance or through borrowing or increasing access to credit. 

Before taking any steps, talk to your attorney about what you can do now to protect your estate from future tax changes. To find an attorney near you, click here.

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Monteleon Law Group
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