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Last spring, I commented on how change was inevitable and how we must all plan for the unexpected. Now in our third year of a pandemic, we are experiencing inflation at 7.9% and counting, record oil, gas, and heating prices, supply chain issues, a volatile stock market, a potential recession on the horizon, and the Russian invasion of Ukraine.
I thought this year's letter would be about the legislative agenda that President Biden attempted to pass with the Build Back Better initiative. However, as we all know, that initiative fell short, and the proposed changes to corporate tax reform, individual income, capital gains, and estate tax hikes were tabled. "Of course, where there's a will, there's a way!" Signalizing renewed efforts to pass tax and other legislation, the Biden administration embedded components of its unrealized agenda into its most recent budget proposal to Congress. The provisions include raising the corporate tax rate from 21% to 28%, raising the top marginal income tax bracket to 39.6%, taxing high-quality dividends and long-term capital gains, a minimum tax rate of 20% on American households worth more than $100 million, changes to GRATs and the GST exemption, and changing the step-up basis rules. (Investment assets held at death are not subject to the capital-gains tax known as the step-up-in basis.)
Although it is my job as your estate attorney to keep you aware of potential changes to tax law and new estate provisions, my advice is that it is far safer to plan now than to wait and see how negotiations in Congress will go. We prepare your documents with built-in flexibility, using administrative clauses to account for many possible scenarios, including pitfalls, uncertainties, and yes, even changes to the law.
These days, estate planning can have little to do with estate taxes. As part of the Tax Cuts and Job Act of 2017, Congress doubled the estate tax exemption starting in 2018, with the exemption rising until it lapses in 2025. This year, the exemption is set at $12.06 million per individual and $24.12 million for couples. At this rate, fewer than 1% of Americans will be subject to estate tax. Whether you fit in this bracket or not, the most critical component of estate planning is determining who will make medical, financial, parental, and business decisions for you if you are unable to do so, to whom, how, and when your assets will be distributed at your death, and building a purposeful and long-lasting legacy.
Speaking of having an impact, it's worth reminding you that the annual gift tax exemption rose from $15,000 in 2021 to $16,000 per person in 2022. You can use this tax break to make gifts up to this amount to a relative, friend, or grandchild each year, free of the federal gift tax. Gifts made to pay for medical expenses or tuition, so long as paid directly to the provider, are not subject to tax!
I am frequently asked, "If you prepared my documents 6, 7, or 8 years ago, why do I need to amend all of the documents?" When we draft your estate documents, we do everything that we can to ensure that it will serve and protect you and your interests for long. But, as I often say, "An estate plan is a process, not a product." Your documents must be reviewed and updated regularly. Federal and state laws are constantly changing, the value and makeup of your assets change, family and health situations change, and recent cases and legal rulings affect how we draft documents today.
We also learn new methods of estate planning through continuing education and update our drafting techniques and forms. For example, in the past few years, cryptocurrency, digital assets, medical marijuana, forced eating, retirement plans, privacy laws, assisted suicide, and income taxes have all been hot topics. How these were handled in an estate was not on anyone’s radar a few years ago. My preference is to update my clients’ estate documents at least every 4 to 5 years. A provision we add may not appear to be important to you now, but it may become critical and could mean the difference between a smooth transition at death or a lawsuit with egregious legal fees. Five years from now, there will be a new list of provisions and new approaches to the concept of estate planning. Remember, an outdated estate plan can be as dangerous as having no plan at all.
Many of my clients have adult children who fall into the Millennial generation. Millennials are the largest generation; they have lived through life-altering events such as 9/11, the 2008 financial crash, the Covid-19 pandemic, and now, inflation not seen in 40 years. A "sandwich generation," many Millennials care for children and aging parents simultaneously. Thankfully, research shows that Millennials are financially savvy. They are buying homes, contributing to retirement accounts, and saving for their children's education. They want to do planning and are turning to will-based estate plans. This is music to my ears as an estate planner. There's just one problem. Having grown up online, not surprisingly, Millennials are comfortable turning to the Internet for solutions. That's fine, but YouTubing how to fix your dishwasher is vastly different from drafting your own legal documents.
There are now several "DIY" websites offering fill-in-the-blank legal documents "at a fraction of the cost of an attorney." Countless problems can arise when using online wills and trusts services. For starters, they may not reflect current laws. What good is a template purchased in 2020 if the laws will change in 2022? Another risk is that DIY programs may not account for specific-state laws. For example, Maryland estate and inheritance laws differ from those in Virginia and Washington, D.C. DIY programs do not provide legal advice, do not ensure that beneficiaries are correct, and are not responsible for mistakes by the drafter or the software. Even one incorrect word or typo can dramatically change the legal meaning of a will, trust, or other estate planning document. These risks are drastically reduced when you work with an estate planning professional. As your trusted advisor, I encourage you to caution your adult children about DIY estate planning. Only an experienced estate planning attorney can advise on the most appropriate and effective terms, provisions, and documents for a person's individual situation.
We have all heard stories about Bitcoin millionaires. The stories are real and have inspired generations of people to get in on the cryptocurrency action. The IRS treats cryptocurrency as property, and, just like your home, taxes are assessed on any increase in value when sold. Gains in this asset class can be larger than on other appreciating assets. The IRS permits taxes on cryptocurrency to be calculated in 3 ways, FIFO, HIFO, and the specific ID Method. Speak with your tax professional if you buy, sell, or trade cryptocurrency for goods or services. Most important, keep detailed records. You must record the date, time, amounts sold or exchanged, and the values of the coin(s) at the time of the transaction.
For those of you who are business owners, our firm has been assisting clients with the Employee Retention Credit (ERC). A business is eligible for the credit if a government order limited your operation by forcing you to close, forced you to have capacity restrictions, or forced you to restrict business functions. A business may be eligible for the ERC if it has had a significant decline in revenue since the beginning of the pandemic. This credit is claimed by amending a business's quarterly IRS payroll tax returns and is based on the wages the business paid to its employees in 2020 and 2021. Please call to learn more about the ERC and whether you are eligible. We have found that many CPAs are not familiar with the rules and that businesses first thought to be ineligible are eligible after a complete analysis is done.
This past year has been busy learning new software programs, working with new attorneys and support staff, and developing relationships with the tax law, tax controversy, litigation, and business law groups. The merger with Frost Law has created synergy and allowed us to assist our clients in broader practice areas. Jackie Oh, who managed our front desk, has been promoted to a paralegal. She has been replaced by Jasmine Prather. Coryn Rosenstock, Esq. was promoted to a director in the firm and was recently recognized by Washingtonian magazine as a Top Wealth Advisor and Rising Star in Super Lawyers. Two new lawyers, James Crosland, Esq. and Paul Tracy, Esq., have joined the practice and we are pleased to announce the recent addition of Gary Hyman, a seasoned business and tax attorney serving the Maryland area for over 35 years. Evelyn Mendoza is my new administrative assistant, so if you can't get a hold of me, try Evelyn. She is doing a great job of keeping me organized in our growing practice inside of a growing law firm.
The team and I thank you for your patience as we continue settling into the merger. As always, we remain grateful for the opportunity to continue serving you and your referrals. Please be sure to keep us informed of any changes to your contact information. If I can be of assistance, please call me at (301) 468-3220.