Estate Planning in 2021 is a bit different than in prior years. The reason being is that the Biden Administration is in the process of severely changing the tax landscape for gifts and estates. While things are still a bit uncertain, here is what we know–if Congress passes the bill that Biden wants, we are looking at an increase in capital gains, estate, and gift taxes that could affect you and later generations. To top it off, there is talk that the new bill will be retroactive to January 1, 2021–yes, six months ago.
Specifically, what we are looking at is an increase in the capital gains tax from 23.8% to 43.4% and taxing appreciated assets at death as if they had been sold. What this does (besides decreasing the beneficiaries’ inheritance by the increased tax) is also take away the step-up in the basis that beneficiaries now enjoy. Currently, an asset held until death escapes income tax and enjoys a capital gains tax only on the difference between an asset when it is inherited and when it is sold. Under the Biden tax, the asset will be taxed at death as if had been sold to the beneficiary and the beneficiary will pay capital gains tax on the difference between when it was originally purchased and now sold. So, if you bought a house for $50,000 back in 1970 and it passes to your child at your death at a value of $550,000 in 2021, your child with have to pay capital gains tax on the increased value of that house from 1970. Under today’s laws, the child would only have capital gains tax on the difference in value from inheritance to the date the asset is sold.
Similarly, the Biden Administration plans to decrease the Gift and Estate tax from 11.7 million to 3.5 million. Under current laws, you can gift up to 11.7 million during your life or at your death without being taxed. Under the proposed laws, this will decrease to 3.5 million, meaning an estate tax once you get beyond that number.
Since the current landscape is unknown, in that we are only anticipating what will come and when it will be effective, we can use one of two methods – act now or wait and see.
For those in the wait-and-see camp, your job is easy – wait it out, – but it may prove costly depending on the final bill and how things may or may not change during your lifetime.
Fort those in the act now camp, there are some strategies we can put in place to save your estate, and ultimately, your beneficiary’s money.
LOCK IN THE CURRENT EXEMPTION
One way to ensure that you get the tax exemption that was created under the Trump Administration is to lock it in now. That means gifting your assets to your loved ones now. This has a few benefits: 1) you get the joy of watching your loved ones receive and benefit from those assets, and 2) the assets will decrease your estate and could increase in value for the beneficiary.
For example, if you had 11.7 million in assets that you could give to a loved one, they could invest it now, to grow over time. At 5% growth, for 10 years that 11.7M could turn into 19.05M and your loved one would have received that free of the proposed estate tax. Conversely, if you wait, and the assets pass at death, your loved one is looking at losing nearly 40% to estate taxes.
If you are not keen on the idea of giving your assets away now, purchasing life insurance to cover the cost of estate taxes might be right for you. This may involve, however, getting current appraisals on your assets so that you can accurately predict what that estate tax may be.
MAKING GIFTS TO MEDICAL PROVIDERS AND EDUCATIONAL INSTITUTIONS
Another way to spend down your estate and give to your loved ones now is to make payments up to your annual gift exemption directly to medical providers and educational institutions. Under current law, you can both help a loved one with school or medical bills and gift them an amount up to the annual exemption to increase that gift to $30,000 per year.
There may be additional strategies depending on your portfolio and unique objectives. It is best to meet with a tax and estate planning professional to strategize your gift and estate plans and get them properly implemented. As with any estate planning strategy, there is always the possibility that Congress could change the laws related to the gift and estate tax exemption. You’ll want to review your gift and estate strategy regularly to be sure that your plans are still relevant based on your financial situation or changes in tax laws and meet your personal objectives.