Summer is upon us and with it comes the natural temptation to enjoy the outdoors, spend time with friends and family, and take a break from work. You may have noticed in the news, however, that there are several legislative proposals that have been introduced in the House and Senate that advocate for significant estate tax reform. While at this time they are only proposals, there is considerable support and momentum behind these proposals. Some version of what is currently proposed will most likely become law. There are even calls to make certain provisions retroactive to January 1, 2021. Even in this time of rest and relaxation, these proposed changes will be important to monitor as they evolve and make their way through our nation’s capital, as they may have considerable effects on future estate planning outcomes. Below is a list that summarizes the key changes that have been advanced by these proposals and laws that will most likely be subject to change:
1. An increase in the marginal income tax rate – 39.6% for incomes over $400,000
2. An increase in the capital gains tax rate and increase in frequency of recognition events (events in which gains for purpose of capital gains tax are realized)
a. 39.6% to gains over $1,000,000 – currently the rate is 20%
b. Eliminate “step-up in basis” at death
i. Gain recognized at time of death and gift
ii. $100,000 lifetime individual exemption for transfers of appreciated assets, $1,000,000 individual exemption at death, $2,500,000 exemption for couple
iii. Potential exemption for family farms and businesses, property given to charity
c. Increased frequency of recognition events for property held in and transferred to and from trusts
i. Transfers to and from non-grantor trusts
ii. Recognition events for grantor trusts if includable in grantor’s estate, when distributions made to beneficiaries, if grantor trust status turned off
3. Significant decrease in federal estate tax exemption
a. Current exemption is $11.7M, set to sunset to $6.75M in 2025
b. Several proposals call for exemption to be reduced to $3.5M
c. Proposed tax rates of 45% of estates and gifts between $3.5M and $10M, 50% for those between $10M and $50M
i. Proposed to be effective for deaths, generation-skipping transfers, and gifts made after December 31, 2021
4. Changes in valuation rules for non-business assets and “passive assets”
a. Assets not being actively used in operation of a business that are transferred are taxable as if they were transferred directly to the individual as opposed to the business entity
5. Elimination of minority interest discountsif the person transferring business assets, person receiving transfer of business assets and their family members collectively have either control or majority interest in business entity
6. Increased scrutiny of transfers to certain trusts and generation-skipping transfers
a. Certain trusts must follow rules or risk failure and total inclusion in the grantor’s estate
7. Potential changes to annual gift tax exclusions
a. $10,000 per recipient, $20,000 per donor
b. Other proposals: $14,000 per recipient, $50,000 per donor
With significant changes to the estate and income tax landscape becoming more likely, now is a perfect time to revisit your estate planning and ensure that it is optimized to meet your family’s needs. 2021 will most likely present a unique opportunity to take advantage of more favorable rules regarding the estate tax exemption, capital gains tax rates, and transfers of assets to and from trusts and business entities.
What can you do now? You can attend one of our upcoming webinars for more details on the proposed changes and opportunities and solutions. You can make an appointment to review your current plan and discuss your options. We recommend you make the appointment early because advanced planning opportunities will require significant preparation. Please do not hesitate to contact our office to schedule a complimentary review of your estate plan to discuss these changes and make certain that your planning is ready to weather the coming changes.