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For many of us, the pandemic has created major changes to our businesses and lives in general. However, with a new administration and Democrats (as of now) marginally in control of Congress, there is the potential of an earthquake in the estate and tax planning world that will effect many of us.
Based on the legislation introduced by Senator Bernie Sanders, the “For the 99.5% Tax Act” proposed changes to your estate plan that, if passed into law, may include:
- A reduction in the estate tax exemption from the current $11.7 million ($23.4 for a married couple to $3.5 million ($7 million for a married couple)
- A reduction of the U.S. federal gift tax exemption to $1 million
- An increase of the progressive federal gift and estate tax rate to 45 percent for a value in excess of $3.5 million; 50 percent for a value in excess of $50 million; and 65 percent for a value in excess of$1 billion.
Additional changes include:
- No more basis step-up on death for assets held through a grantor trust (if the assets weren’t included in the gross estate upon the death of the grantor)
- The new requirement for GRAT (Grantor Retained Annuity Trusts) would be a minimum 10-year term with a 25 percent minimum value for the remainder interest
- For transfers of interests in family limited partnerships(for instance), the elimination of reduction of discounts
But wait, there’s more!
- It will become much tougher to create dynasty trusts that are exempt from generation-skipping transfer taxes
- Beneficiaries of a grantor trust may be (and, generally, will be) subject to a federal gift tax under certain circumstances
- The annual gift tax exclusion for certain types of transfers will be limited to no more than $20,000 per donor
Unfortunately, these are only Senator Sanders’ proposed changes. Senator Chris Van Hollen proposed changes that might even be more drastic than Senator Sanders!
And yes, your taxes will undoubtedly go up; but if this makes you feel a bit better, we won’t be anywhere near the highest historical marginal income tax rates which were 94 percent in 1944 and 1945and 92 percent in the postwar years of 1952 and 1953. Since 1991, they’ve hovered in the low to high 30 percent range.
So, the above proposed changes represent the potential challenges (potential, since they are just proposals at this point). Now—let’s take a glass-half-full look at opportunities you may have under the proposed changes:
- Opportunity Number 1: If you have a college-bound child, consider paying the tuition directly to the school while also making the exclusion gift of $15,000 to your child in the same year. It can effectively reduce the size of your estate (and the tax implications) over time. Or, a parent or grandparent can gift up to $75,000 (or $150,000 for a married couple)to a college savings 529 Account without utilizing an estate tax exemption.
- Opportunity Number 2: It may still be possible to make large, taxable gifts that effectively utilize your exemption amount. This may be tricky, as any law passed may be retroactive to January 1, 2021;but it is worth examining.
- Opportunity Number 3: In New Jersey or New York, you’re going to want to create a disclaimer or credit shelter trust. You may be able to double your estate tax exemption by giving a surviving spouse the choice to renounce all or part of their inheritance into a credit shelter trust that can be used by the surviving spouse for support, medical or educational expenses. After their death, the balance of the trust would be free from estate tax. We include these in almost all of our documents.
- Opportunity Number 4: Look to life insurance a sa way to ensure liquidity should the reduction in estate and gift exemptions of$3.5 million per person/$7 million for a married couple be passed.
These are just several examples of ways you can “win” in light of proposed changes to the tax laws. While you may not be living the life of a billionaire, your estate may be worth more than you think (for instance, your home and retirement accounts are likely worth more than they were even a few years ago), and your estate plan should reflect those increases.
No matter what your current financial situation, it’s important to review your estate plan on a regular basis.
Related: When You Don't Know Who To Trust