The Tax Cuts and Jobs Act (TCJA) created higher exemption levels for federal estate and gift taxes that will change in a few years, if not sooner. The TCJA raised the amount that individuals may gift and be exempt from gift or estate tax to $11.7 million. As long as your estate is valued at under the exemption amount, it will not pay any federal estate taxes, and the vast majority of estates do not owe any tax. However, the increased exemption is set to expire at the end of 2025. Depending on what Congress decides, it could be lowered to $5 million or down to $3.5 million. The IRS has communicated that there will be no “claw back” of amounts gifted prior to the higher exemption sunsetting. Given the current tax environment, individuals may wish to speak with their advisor about estate planning strategies and whether it makes sense to make gifts now since the ability to gift at these levels may not exist much longer. Below are some things to keep in mind as you contemplate your plans.
Review estate planning documents and strategies
Many people review their estate plan at a regular frequency. The general recommendation is at least every three to five years or when there is a significant life event or change in financial situation. Individuals should discuss their estate plan with their advisor to ensure it includes proper beneficiary designations on retirement accounts and insurance policies, wills, powers of attorney, health-care directives, and revocable trusts. Additionally, any existing trusts should be reviewed to determine if changes are needed.
Develop a strategy for low cost-basis assets
With a new administration in the White House, there has been discussion of the possibility of an end to the “step up” in basis. Typically, when an asset is inherited, it receives a step up in basis to the current market value at the time of death of the original owner, avoiding taxes on the appreciation of the asset from its original cost. The elimination of the step up in basis could be highly detrimental from a capital gains perspective for people inheriting property that has risen significantly in value. There are estate planning strategies that individuals and families with appreciated assets may wish to explore. Some vehicles for tax-efficient wealth transfer include utilizing trusts in an estate plan or establishing a Family Limited Partnership or Family Limited Liability Company. A qualified estate planning advisor can help you determine optimal strategies for your goals.
Plan for potential state estate taxes
While much attention is focused on the federal estate tax, there are a number of states that apply different tax rates or exemption amounts. A taxpayer may have net worth that is well below the federal exemption level, but that also may be above the exemption amount for his or her particular state. An advisor or attorney with expertise in specific state law can help implement estate planning strategies to mitigate state estate or inheritance taxes. Fortunately, for those of us who live in Texas, there is no state inheritance or estate tax; however, a resident of Texas who has property in another state needs to be aware of that states’ inheritance tax rules.
Estate planning in 2021
Proper estate planning is critical for families at all levels of wealth. It is not only about mitigating taxes; it is necessary for individuals to ensure an orderly transition of wealth to heirs or to charitable causes. It can also be used to avoid a costly and lengthy probate process. The current tax environment creates a bit more urgency for individuals with appreciating assets, those with a family business, and others with more complex or advanced planning requirements. Our advisors look forward to helping you and your loved ones implement tools and strategies to protect and preserve your wealth for current and future generations.