Planning For Proposed Changes to Estate Tax Laws
Many changes have been in the works this year which impact estate planning. The Senate has introduced the “For the 99.5 Percent Act,” and the “Sensible Taxation and Equity Promotion Act of 2021.” The Biden Administration also announced the American Families Plan which proposed significant tax law changes. With these potential changes in estate planning on the horizon, it is important to understand some of the key takeaways from these proposals.
· Federal Estate Tax Exemption. A reduction of the federal estate tax exemption to 3.5 million dollars. Currently the federal estate tax exemption is $11.7 million. Currently, a widow/widower for example, could leave their $11 million dollar estate to his/her children and the children would not pay any federal estate tax. Under the proposed changes in the “For the 99.5 Percent Act,” the children would pay approximately $3,375,000 in federal estate tax (i.e., $7.5 million at a 45% rate, explained below). The proposed effective date of this change would be January 1, 2022.
· Federal Gift Tax Exemption. A reduction of the gift tax exemption to $1 million annually. The current federal gift tax exemption of $11.7 million is a lifetime exemption, with no annual limitations. The “For the 99.5 Percent Act” also places a limitation on gifts that qualify for the annual gift tax exclusion. The bill proposes to reduce the annual exclusion to $10,000, with a cumulative amount limit of $20,000. Currently the annual gift tax exclusion is $15,000 per person, with no cumulative limitations. The proposed effective date for this change would be for gifts made on or after January 1, 2022.
· Estate and Gift Tax Rates. An increase in the estate and gift tax rates, creating a graduated series of rates from 45% to a top rate of 65%. Currently the estate tax rate is a flat 40%. The “For the 99.5 Percent Act” proposes a sliding scale for rates as follows: Estates valued over $3.5 million, but less than $10 million, would be subject to an estate tax rate of 45%; Estates valued over $10 million but less than $50 million would be subject to an estate tax rate of 50%; Estates valued over $50 million but less than $1 billion would be subject to an estate tax rate of 55%; and Estates valued over $1 billion would be subject to an estate tax rate of 65%.
· Step Up in Basis. A cap on the step up in basis for income tax purposes on an individual’s estate. Currently, property that is included in a decedent’s estate for federal estate tax purposes receives what is called a “step up” in basis, which means that the beneficiaries who inherit the property are not required to pay income tax on any capital gain. The beneficiary’s basis in the property is adjusted to the fair market value of those assets as of the decedent’s date of death. The act proposes that there will be a realization of capital gains to the extent such gains are in excess of a $1 million exclusion per person.
· Grantor Trusts. Currently, with a grantor trust, a grantor could pay income taxes on trust assets during his or her lifetime, an estate tax savings tool for the grantor’s beneficiaries. The “For the 99.5 Percent Act” would provide that the assets held in a grantor trust would be included in the grantor’s estate (as they are currently), but further, would be considered gifts to the beneficiaries, making them subject to the gift tax. This change will adversely affect irrevocable life insurance trusts (ILITs), as these typically involve funding on an annual basis.
The acts include additional provisions relating to the application of the Generation Skipping Transfer (GST) tax exemption, grantor retained annuity trusts (GRATs), and discounts on valuations for the transfers of non-business assets in partnerships, LLCs, and family-owned corporations. The provisions of these Acts, as currently proposed, would not apply to trusts and transfers created prior to enactment! So now is the time for high-net-worth individuals to take proactive steps to address these potential limitations.
Next Steps
We are closely watching this legislation and take potential changes into account as we design your plan. If you have questions about this pending legislation, whether it could impact you, and if so, what strategies can be employed to minimize the damage, call us at (203) 446-4725 to schedule an appointment today!
Attorney Amanda Gilbert-Largent
Wiley Etter Doyon, LLC