Estate Planning Opportunities in Anticipation of Tax Changes

March 10, 2021
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We saw a major swing of power with this past election as President Biden moved into the White House and Democrats gained a technical majority in the Senate. No matter your political beliefs, it is important to study political trends when it comes to financial planning. This is especially true when addressing your tax planning from year to year and your long-term estate plan.

We don’t know exactly what these next two years will bring, or if majority control will switch back in either the House or Senate in the 2022 midterm elections. Our economy is still reeling from the pandemic and economic recovery presents myriad challenges on the horizon for everyone.

Wealthier individuals and business owners, however, definitely need to pay attention to the political landscape as tax laws are likely to be affected by the new administration. We still don’t know what legislative changes will actually be passed. We don’t know when they will be enacted. That shouldn’t stop you from preparing now for tax law changes likely to take place in the somewhat near future. Let’s look at a few tax policies that could be affected:

Income Tax

This will have the most immediate impact for high-income earners. Biden has made it clear he wants to continue offering more tax breaks for lower-income households while wealthier people would be seeing higher tax liabilities. Putting more money toward retirement accounts, contributing more to charity and giving more tax-free gifts are good opportunities to reduce your taxable income from year to year. If you are not already implementing annual gift-giving as part of your estate plan, now is a good time to start.

Gift Tax

Let’s talk about the gift tax exemptions and limits. You are currently allowed to give anyone a cash gift of up to $15,000 per year (or $30,000 if each parent gives the maximum gift). This is a great strategy for wealthy individuals looking to distribute their wealth to their heirs through annual payments rather than one lump sum upon death—an amount that is subject to costly federal and state estate taxes. The current gift, estate and generation skipping tax (GST) exemption amount is $11,700,000. You want to take advantage of this opportunity while it exists.

Under law (as part of the Tax Cuts and Jobs Act of 2017), this exemption amount will automatically “sunset” and be cut by 50% in 2026 (to roughly $6 million per person, depending on inflation adjustments at the time). Biden’s policies could force changes sooner. Some numbers already out there include the lifetime gift, estate and GST exemption being reduced to $3,500,000 and a maximum of $1 million in tax-free lifetime gifts.

Estate Tax

Estate taxes are less of a priority for the Biden administration and effects won’t be felt as immediately. However, proposed changes are important to monitor as you develop and refine your long-term estate plan. We might see the estate tax rates increase from 40% to a much higher percentage yet to be announced. We could see the stepped-up basis rules eliminated and valuation discounts between family members be eliminated.

With these potential changes ahead—not to mention other uncertainties in this crazy world—here are a few estate planning opportunities you should be taking care of now:

  • Annual Exclusion Gifts—Gift-giving can be done tax-free each year as long as you don’t exceed the annual exemption amounts ($15,000 per recipient) or the lifetime amount (currently $11,700,000, but likely to decrease by 2026 or sooner). These smaller gifts can accumulate to significant amounts and allow you to preemptively distribute your wealth to your beneficiaries.
  • Asset Gifts—You can leverage the current high estate tax exemption amount ($11,700,000) by giving gifts of fractional interests in real property or business ownership interests in a family business that qualify for valuation discounts. You will want to protect against potential retroactive changes to the total gift exemption by using disclaimers, formula gifts and/or lifetime qualified terminal interest property (QTIP) trust elections.
  • Make Loans to Children—You can provide low-interest loans to your children and heirs to help them buy homes or start businesses.
  • Grantor Trusts—Take advantage of grantor trusts to minimize estate taxes.
  • Spousal Lifetime Access Trust (SLAT)—Establish a trust for your spouse to avoid significant estate taxes upon your death and utilize the current high gift exemption amount.
  • Irrevocable Life Insurance Trust (ILIT)—These can be used in conjunction with various estate planning strategies to provide more liquidity and protect your financial assets in case of a premature death.
  • Grantor Retained Annuity Trust (GRAT)—These are used to enable a parent to transfer assets with potential for high appreciation to their children. Low valuations and low interest rates make this option even more attractive right now.
  • Intentionally Defective Grantor Trust (IDGT)—Giving gifts and sales to an IDGT can allow you to transfer large business interests, real property and other investment assets with strong cash flow.

As you can see, there are many different estate planning opportunities you might want to take advantage of now. These are good opportunities no matter what, and could be even more timely in the anticipation of major tax law changes that might be on the horizon.

For all your financial planning, tax planning, business planning and estate planning needs, contact Illumination Wealth today.