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Estate Planning Considerations Under a New Administration: TuckerAllen Town Hall

TuckerAllen recently hosted a virtual town hall discussing the estate planning considerations that should be kept in mind as the Biden administration begins.

The town hall was hosted by moderator Scott Trout and featured a panel of TuckerAllen estate planning attorneys who reviewed potential changes to estate planning procedures that could be coming under the new administration and what you can do to plan accordingly.

Changes in Estate Tax Threshold

The estate tax is a tax that is levies against the overall value of the estate of a deceased person prior to distribution to the beneficiaries. This is the threshold for after which a person would have to pay an estate tax.

In 2020, the federal estate tax exemption was $11.58 million for a single individual and $23.16 million for a married couple. The tax rate on inheritances more than the exemption is a flat 40%.

Potential new numbers for the estate tax threshold have been $5 million and $3.5 million for individuals and double that for married couples. There has also been discussion of eliminating the ability of beneficiaries to avoid capital gains taxes on assets received through a process known as a step-up basis.

Additionally, there has also been discussion of increasing the estate tax from 40% to 45%. The most likely result is a combination of these. The goal is to increase the number of individuals subject to an estate tax as well as the amount of tax imposed on an estate.

Estate Tax Threshold Implications for Estate Planning

Individuals will need the ability to be more flexible in their estate planning to account for the potential changes to the estate tax.

One potential idea that provides flexibility is to create what is known as a Spousal Lifetime Access Trust. This is a type of irrevocable trust that allows one spouse to user their exemption amount and remove those assets from their estate, but also allows them to name their spouse as a beneficiary of the trust maximizing their flexibility.

It should be noted this is still an irrevocable trust and does not provide the same flexibility as an individual who does not have their assets in an irrevocable trust.

Another option is to include a disclaimer or contingent marital trust provisions in any trust they create now before any legislation is passed. These provisions allow for a taxpayer to make a gift to a trust, user their exemption amount, and then wait a period of time for either the trustee of the trust or the beneficiaries to decide if it makes sense from an estate tax perspective to change the nature of a gift.

Under a disclaimer, the beneficiaries of the trust would disclaim their interest in the gift within nine months of the initial gift and the gifted assets could revert back to the donor, thus nullifying the gift and saving the exemption amount.

Change in Gift Tax Threshold

In order to keep people from gifting their assets on their deathbed and thereby avoiding estate tax, Congress enacted a gift tax to close the loophole.

Gifts more than the gift tax threshold are taxed just like an inheritance would be. The threshold amount is the same, so you have one pot to draw from for both gift and estate taxes.

Each year, you have an annual exclusion amount of gifting you can make to an individual, which does not count toward your lifetime gift and estate tax threshold.

You can make gifts more than this annual exclusion amount, but you need to file a gift tax return with the IRS to let them know about it. You do not have to pay taxes on the gifts you make until you exceed your lifetime gift tax threshold.

If you do get over the lifetime gift tax amount, you, as the gifter, must pay the tax and not the gift recipient.

The current gift tax threshold matches up with the estate tax threshold of $11.7 million. They are integrated so you can’t gift $11.7 million and then die and exclude another $11.7 million.

The current annual exclusion for gifting is 15k. This is per person – you can do any number of people and combine with your spouse for double the amount.

If you go over the threshold, you accrue taxes in the amount of 40% of the value of the gift.

There is discussion to lower the threshold to $1 million. Most likely, previous gifts would be grandfathered in. However, they may draw from a separate pot or integrate it.

Gift Tax Threshold Implications for Estate Planning

You should make your gifts now while the threshold is so high. If you want to pay for your grandkids’ education, it is a good idea to put it in a 529 account even if they are young – you can even get a tax break for it.

In the future, you will have to adapt to having less leeway on gifting:

  • Loans to friends can be considered a gift.
  • Adding someone to a bank account of ownership of a car or house can be a gift.
  • Paying medical bills or tuition can be a gift.

It is important to keep a few things in mind:

  • Donations to 501(c)(3) charitable organizations are not considered gifts.
  • The gift tax exclusion does not mean those gifts don’t count for Medicaid purposes.
  • You should file a tax form if the gift is over $706 so that you do not get penalized.
  • Most gifts are small amounts and do not need to be reported. The IRS will not hunt you down if you pay for your child’s wedding.

Ending Step-Up Basis

A step-up basis is essentially recalibrating the value of an appreciated asset for tax purposes upon inheritance.

Normally, an asset is worth more in value upon passing to the beneficiary (when the owner passes) than when the owner first acquired the asset. The “basis” is the value at which the owner first acquired the asset.

A “step-up” in basis means that when it’s passed to the beneficiary, the “basis” of the asset is adjusted to the current value (rather than its original value). A “step-up in basis” reflects the changed value of an inherited asset. This helps minimize/reduce the capital gains tax on the property.

Current Practice and Proposed Changes to Step-Up Basis

Right now, stepped-up basis is allowed and followed, meaning the minimization of capital gains tax for assets, including your home, is applied when you pass on the property.

There has been discussion of eliminating the stepped-up basis at death. This would mean that the basis of the asset would just not be adjusted upon passing to a beneficiary, and there will be a capital gains taxed applied on the appreciation of the property.

Step-Up Basis Implications for Estate Planning

Of all the potential changes being discussed, this would likely impact a larger part of the population (outside of the very wealthy that are concerned about estate tax exemptions). This is because assets like real estate could incur a large appreciation, depending on how long the owner held it for, and there could be a sizeable capital gains tax that is applied when the property is sold.


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