Significant Proposed Estate Planning Changes Seem to Be Disappearing
When you closely monitor estate planning changes for almost 20 years you learn to not overreact. There seems to always be a significant proposed change in the law that may affect estate planning. 2021 was no exception. Three major proposed changes were included in President Biden’s Build Back Better plan:
- Reducing the estate tax exemption to $5 million (adjusted for inflation).
- Triggering a capital gains tax at death.
- Changes to how certain grantor trusts are taxed.
Reducing the Estate Tax Exemption to $5,000,000
Currently, you can transfer up to $11.7 million before incurring any estate tax. This proposal would reduce the estate tax exemption to $5 million, adjusted for inflation. With increases in home prices and the value of stock portfolios, this would affect a lot more people.
Capital Gains Tax at Death
Currently, your estate receives a step-up in cost basis at death. This means that your assets could be sold at death without incurring any capital gains tax. You would only incur an estate tax if your estate was greater than the estate tax exemption. This proposal would treat all assets as being sold just prior to death and thereby triggering a capital gains tax on the “sale” of the assets. This “deemed disposition” is similar to the Canadian laws on inheritance. Presumably, if your estate was large enough, you could incur both capital gains tax and estate tax at death.
Changes to Taxes on Grantor Trusts
Currently, you can create certain trusts that are intended to benefit someone else (e.g. spouse or children), remove those assets from your estate, and eliminate income tax on most sales transactions between you and those trusts. The current proposal would eliminate the ability to keep those benefits on any future gifts to those trusts.
Latest Estate Planning Proposal
Two months ago, many commentators considered these proposals a done deal. We had many people calling us in a panic to make changes to their plan before the changes took effect. Our response to almost all of those calls was the same: don’t overreact. Now, as the holidays approach us, it appears as though none of these proposals will be a part of the Build Back Better plan. While many were surprised by the removal of these proposals, this is not uncommon. In fact, these exact same proposals were part of former President Barack Obama’s plan but never came to fruition.
This does not mean that changes won’t occur at some point down the road. In fact, as the law stands now, the estate tax exemption is scheduled to be reduced to $5 million, adjusted for inflation, on January 1, 2026. Moreover, there will continue to be proposals, similar to or just like the ones above, that will eventually pass. Therefore, we ask clients the following question: Would you want to do this even if the law does not change? This simple question can help most people decide if this type of irrevocable planning is right for them.
Interestingly, almost 10 years ago, my clients were faced with a similar situation. In 2012, the estate tax exemption was $5,120,000. If Congress did nothing, the exemption would have been reduced to $1,000,000. Many clients understandably wanted to make use of the $5,120,000 exemption before it was lost for good. Billions of dollars shifted hands before year-end. Ultimately, Congress passed the American Taxpayer Relief Act (“ATRA”) which “permanently” increased the estate tax exemption to $5 million. People that only transferred money to avoid taxes were frustrated and spent a lot of money trying to undo their gifts.
As your Orange County estate planning attorney, our goal is to advise you and your family not only on the latest estate planning topics, but also to guide you on making the right decisions for you and your family regardless of what Congress proposes next. Contact Modern Wealth Law today at (949) 371-5003 to schedule a consultation or click here to submit a contact form.
John Wong advises on all aspects of estate planning, probate, asset protection and trust administration. He believes that estate planning is about planning for life; while having protections in place should the unexpected occur.
