25 January 2022

Estate Planning in Light of a New Presidential Administration: What Should You Do Now?

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The recent changes in the White House and the Senate may have you wondering how the federal estate and gift tax laws may be affected and when changes may be forthcoming.

During the presidential campaign, Joe Biden pledged to roll back many of President Donald Trump’s tax policies. In response to the Tax Cuts and Jobs Act (TCJA), President Biden has promised a progressive approach to taxation, focused primarily on increasing the burden on high-income individuals and businesses.

Now that there is a Democratic majority in the Senate and the House of Representatives, estate and gift tax law changes are expected to occur in 2021 or 2022.

Proposals for estate and gift taxes 

The TCJA temporarily doubled the federal estate and gift tax exemption to $10 million (adjusted annually for inflation) through 2025. The 2021 exemption is $11.7 million for individuals and $23.4 million for married couples. These TCJA amounts are scheduled to expire after 2025 to $5 million for individuals and $10 million for married couples, adjusted annually for inflation. Changes to these amounts are now expected to occur much sooner.

During his campaign, Biden proposed reducing the exemption to $3.5 million for estate taxes and only exempting $1 million for the gift tax. He also favors imposing a top estate tax rate of 45 percent, from the current rate of 40 percent.

In addition, Biden would like to end the “step-up” in basis that spares beneficiaries substantial income tax liability for capital gains on inherited assets that have appreciated in value, such as stocks, mutual funds and real estate. If a beneficiary sells an inherited asset now, the capital gains generated is the difference between the asset’s fair market value at the time of sale less the stepped-up basis (the fair market value of the asset at the date of the deceased’s death), rather than the basis at the date of the original purchase. Without the step-up in basis, the capital gains generated upon the sale of inherited assets would be much higher, increasing the capital gains taxes paid by a decedent’s heirs.

Decision-making guidance 

In order to make good, timely decisions, you must know “where you are now” in order to know “where you want to go.”

Potential tax law changes are a reason to prompt a review of your estate plan, as well as life changes, such as a marriage, the birth of a child, a grandchild, the death of a loved one or a divorce.

When it comes to potential law changes, there are two important best practices:

  1. It is not wise to make decisions out of the fear that tax laws may change, especially big decisions that can have lasting effects. It is prudent to be informed, prepared and not fearful to make decisions and implement planning before changes occur.
  2. The most important action that an individual or family can take is to be completely prepared for change by understanding your current estate plan and the applicable planning tools available to save taxes and accomplish your goals and objectives.

Ask yourself these questions:

  • Do you understand the details of your current estate plan and what happens upon your death?
  • Do you know the value of your assets and the amount of any liabilities?
  • Have you determined whether estate taxes are projected to be an issue for you and your family?
  • Have you recently reviewed the beneficiary designations on your retirement plans and life insurance?
  • Have you considered the options available to modify the terms of any irrevocable trusts?
  • When did you last update your estate planning documents such as your will, revocable living trust, power of attorney and health care directive?

Review your estate plan now 

Once you understand what your current estate plan is, consider the planning options available and incorporate as much flexibility into your estate plan as possible.

If you don’t take the time to be prepared and consider planning before the tax laws change, then the estate planning process could turn into crisis management. That greatly increases the risk of making less-than-ideal or bad decisions or losing significant opportunities altogether.

The shifting political landscape has substantially increased the probability of changes in the near future. Therefore, do not wait any longer to contact a qualified estate planning professional to begin the process of reviewing your estate plan and the planning options available to you.

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