So much has happened since I last wrote. If the past year has reinforced anything, it’s that change is inevitable, and we must all plan for the unexpected.
Since 2017, estate planning has been relatively constant. However, all eyes are on the new administration, with the largest tax reform since 1993 on the horizon. There is no way to know what will happen or when the anticipated changes would take effect. Some changes could even be retroactive. Our job as estate planners is to keep a sharp eye on the many proposals being presented (on federal and state levels) and help our clients be prepared and protected. This year’s client letter addresses the significant changes being proposed that could affect your estate planning.
Certain Provisions of the Tax Cuts and Job Act of 2017, which passed under the Trump administration, are unlikely to make it to 2025, as the individual tax and the estate tax provisions are all set to expire after 2025. One such example is the estate tax exemption set at $11.7 million for individuals or $23.4 million for married couples.
President Biden has released an outline for the “American Jobs Plan” — a federal initiative to create domestic jobs, rebuild national infrastructure, and increase American competitiveness. To fund the plan’s estimated cost of $2 trillion, the administration has also proposed tax policies that focus primarily on corporate tax reform but hint strongly at individual income, capital gains, and estate tax hikes.
Included in President Biden’s proposal are the reduction of the estate tax exemption amount to $3.5 million per person and the gift tax exemption to $1 million per person. Further, the plan calls for increasing the top rate for the estate tax to 45% and possibly 65% for estates valued at over $1 billion.
The American Jobs Plan proposal also includes eliminating the step-up in basis adjustment at death. This means that the original cost basis will be inherited by the estate’s beneficiaries so that, besides any estate taxes, a beneficiary will also have to pay capital gains tax when an asset of the decedent is sold. Another anticipated change is an increase in the tax on capital gains earnings. Biden’s proposed plan would increase the capital gains tax for individuals earning over $1,000,000 to 43.4% — effectively taxing those gains as ordinary income.
Another proposal introduced, the Sensible Taxation and Equity Promotion Act (STEP), would allow individuals to exclude up to $1 million in unrealized capital gains from tax and the ability to pay the tax in installments over a 15-year period for any illiquid assets like a farm or business sold, retroactive to January 2021. This change in basis or income tax treatment on inherited property, coupled with these other proposals, will rock estate planning as we know it today.
Other proposals institute a time limit for Generation-Skipping Trusts of 50 or 80 years and impose a 10-year minimum term limit for Grantor Retained Annuity Trusts (GRATs), as well as requiring GRATs to have a 25% minimum value for the taxable remainder. Also, on the table is limiting or eliminating minority or other valuation discounts and to include any trust in which the decedent is the grantor for income tax purposes to be included in the estate of the grantor.
While many of these proposals target complex estate planning strategies, everyone will be affected, regardless of wealth level, due to the potential change in basis rules.
President Biden has advocated for raising the top personal income tax rate to 39.6% for those earning $400,000 or more. He has also expressed pushing back President Trump’s corporate tax cut, taking it from 21% to 28%, and is promoting higher taxes on capital gains for those individuals earning $1 million or more. Biden’s proposal is also considering higher payroll taxes on incomes above $400K to increase Social Security funding. Some itemized deductions will again be limited.
Now is the time to take advantage of the gift tax annual exclusion. This allows you to give up to $15,000 each year to as many people as you want with none of the gifts being subject to a gift tax. This could apply to parents giving money to their children, including the gifting of property such as a house or a car, or any other transfer. There is also a lifetime exemption of $11.7 million. Even if you gift someone more than $15,000 in one year, you will not currently have to pay any gift taxes unless you go over that lifetime gift tax limit, although you do need to report gifts over the annual exclusion amount to the IRS via Form 709. The IRS will lower your remaining lifetime exclusion and then use that new amount when determining how much of your estate owes estate tax.
There are several items that the IRS doesn’t count as a gift, however. You can give unlimited gifts in these categories without owing a gift tax or having to file gift tax paperwork:
If your assets are worth more than the proposed $1,000,000 gift tax exemption and $3,500,000 estate tax exemption, consider making more significant gifts this year –soon! This could mean gifting up to the current estate and gift tax exemption limit, as well as considering GRATs or other estate planning techniques. Because this planning is specific to each person’s unique family situation and assets, we strongly advise you to schedule an appointment (in-person or virtual) so we can review your documents, discuss any life changes that may have occurred since we last met (ex: divorce, remarriage, new children, change in assets, etc.), identify your new goals, objectives, and needs, and then determine what course of action is best for you.
This year marks the 25th anniversary of our firm. We are fortunate to have a terrific team that continues to service our clients. As you may already know from my February 2021 letter, this year, we joined forces with Frost Law, and I am now the partner and chair responsible for leading the estate planning practice area for the combined firm.
As we look ahead, I want to reiterate that I am not retiring. I intend to continue practicing estate law, my life’s work. It was simply time for me to practice what I preach to my clients who are also business owners and that is the importance of having a business succession plan in place.
My first goal was to ensure that we could continue to serve you and your loved ones for years to come. The merger brings with it additional lawyers and support staff and experience in tax law, including tax controversies, business law, and litigation. Little has changed; the Altman team remains intact, our office locations remain the same, adding additional offices in Annapolis and Frederick, and your documents and client files remain secured by us. If you have questions about the merger, I welcome you to contact me directly at 301-468-3220.
We should have your most current contact information. Please complete a quick client update form at www.altmanassociates.net/update or call us with any changes. For those of you active on social media, we invite you to connect with us on Facebook, Twitter, and LinkedIn. And keep us connected with your other trusted advisors so your estate and financial plans complement one another and are monitored and implemented. We also greatly appreciate reviews if you have the time!
As always, I remain grateful for the support and trust of our clients, wealth advisory network, friends, and family. If we can assist you or your loved ones, please reach out.
I look forward to speaking with you and catching up.
Gary Altman, Esq.