The recent changes in the White House and the Senate may
have you wondering how the federal estate and gift tax laws may be affected and
when changes may be forthcoming.
During the presidential campaign, Joe Biden pledged to roll
back many of President Donald Trump’s tax policies. In response to the Tax Cuts
and Jobs Act (TCJA), President Biden has promised a progressive approach to
taxation, focused primarily on increasing the burden on high-income individuals
and businesses.
Now that there is a Democratic majority in the Senate and
the House of Representatives, estate and gift tax law changes are expected to
occur in 2021 or 2022.
Proposals for estate and gift taxes
The TCJA temporarily doubled the federal estate and gift tax
exemption to $10 million (adjusted annually for inflation) through 2025. The
2021 exemption is $11.7 million for individuals and $23.4 million for married
couples. These TCJA amounts are scheduled to expire after 2025 to $5 million
for individuals and $10 million for married couples, adjusted annually for
inflation. Changes to these amounts are now expected to occur much sooner.
During his campaign, Biden proposed reducing the exemption
to $3.5 million for estate taxes and only exempting $1 million for the gift
tax. He also favors imposing a top estate tax rate of 45 percent, from the
current rate of 40 percent.
In addition, Biden would like to end the “step-up” in basis
that spares beneficiaries substantial income tax liability for capital gains on
inherited assets that have appreciated in value, such as stocks, mutual funds
and real estate. If a beneficiary sells an inherited asset now, the capital
gains generated is the difference between the asset’s fair market value at the
time of sale less the stepped-up basis (the fair market value of the asset at
the date of the deceased’s death), rather than the basis at the date of the
original purchase. Without the step-up in basis, the capital gains generated
upon the sale of inherited assets would be much higher, increasing the capital
gains taxes paid by a decedent’s heirs.
Decision-making guidance
In order to make good, timely decisions, you must know
“where you are now” in order to know “where you want to go.”
Potential tax law changes are a reason to prompt a review of
your estate plan, as well as life changes, such as a marriage, the birth of a
child, a grandchild, the death of a loved one or a divorce.
When it comes to potential law changes, there are two
important best practices:
- It is not wise to make decisions out of the fear
that tax laws may change, especially big decisions that can have lasting
effects. It is prudent to be informed, prepared and not fearful to make
decisions and implement planning before changes occur.
- The most important action that an individual or
family can take is to be completely prepared for change by understanding your
current estate plan and the applicable planning tools available to save taxes
and accomplish your goals and objectives.
Ask yourself these questions:
- Do you understand the details of your current estate
plan and what happens upon your death?
- Do you know the value of your assets and the
amount of any liabilities?
- Have you determined whether estate taxes are
projected to be an issue for you and your family?
- Have you recently reviewed the beneficiary designations
on your retirement plans and life insurance?
- Have you considered the options available to
modify the terms of any irrevocable trusts?
- When did you last update your estate planning
documents such as your will, revocable living trust, power of attorney and
health care directive?
Review your estate plan now
Once you understand what your current estate plan is,
consider the planning options available and incorporate as much flexibility
into your estate plan as possible.
If you don’t take the time to be prepared and consider
planning before the tax laws change, then the estate planning process could
turn into crisis management. That greatly increases the risk of making
less-than-ideal or bad decisions or losing significant opportunities
altogether.
The shifting political landscape has substantially increased
the probability of changes in the near future. Therefore, do not wait any
longer to contact a qualified estate planning professional to begin the process
of reviewing your estate plan and the planning options available to you.
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