King & Wood, P.A.

What Jackie Kennedy Knew about CLATs and Estate Planning

“Jacqueline Kennedy Onassis will long be known for many superlative distinctions: an internationally beloved former first lady of the United States, one of the most influential contributors to the restoration and preservation of the White House and a peerless cultural icon.”

What most people don’t know about Jackie Kennedy was her role as an innovative steward of her family’s wealth and philanthropic legacy, reports a recent article from Forbes titled “Elevating Your Estate And Legacy: A Lesson From Jackie Kennedy.” After her husband’s assassination, she was in charge of a $44 million plus estate and her actions spoke volumes about her values and view for the future.

Jackie Kennedy initiated a Charitable Lead Annuity Trust (CLAT), which today many refer to as the Jackie Onassis Trust.

She created a CLAT receptacle through her will, so her children could elect to transfer some or all of their inherited assets in exchange for significant charitable, tax and non-tax benefits. They were not required to do this. However, it was an option for assets including stock, real estate and other capital. The CLAT offered her children three possible benefits: avoiding federal estate tax on all and any assets transferred to the CLAT, tax-efficient philanthropic giving for a limited number of years and continued investment of CLAT assets, which could be ultimately returned to the child or gifted to future generations at the end of the CLAT’s charitable period.

In addition, during the charitable term, the annual payments required to be distributed via the CLAT to charities would have created income tax deductions against the CLAT’s taxable income.

Despite their mother’s recommendations, the first lady’s children opted against funding the CLAT.

According to an article from The New York Times in 1996, if the Jackie Onassis Trust was worth $100 million and if the beneficiaries had executed the CLAT, the family would have inherited approximately $98 million tax-free in 2018, with charities receiving $192 million.

Instead, the children paid $23 million in estate taxes, leaving the estate with $18 million.

Besides the clear adage of “Mother knows best,” this is an example of the potential power of a CLAT to satisfy the charitable and family wealth transfer of the trust creator and individual beneficiaries. Since the 1960s, more sophisticated trust variants have been created to improve on the original CLAT.

One of these is the Optimized CLAT, a tax-planning trust which accomplishes four goals. It generates a dollar-for-dollar tax deduction in the year of funding, returns an expected 1x-5x of the initial contribution back to the contributor, immediately exempts contributed assets from the 40% federal gift and estate tax and exempts the transferred assets from the contributor’s personal creditors.

These complex estate planning strategies will become increasingly popular as federal estate taxes return to lower levels in near future. Your estate planning attorney will guide you as to which type of trust works best for you and your family, for now and for generations to follow.

Reference: Forbes (Aug. 19, 2022) “Elevating Your Estate And Legacy: A Lesson From Jackie Kennedy”

How to Plan in a Time of Uncertainty

“Pandemics, inflation, rising interest rates, war in the Ukraine—uncertain times indeed! And yet, in the world of estate planning, almost every change in the zeitgeist offers its own suite of planning opportunities and applicable techniques.”

There’s a saying in estate planning circles that the only people who pay estate taxes are those who don’t plan not to pay estate taxes. While this doesn’t cover every situation, there is a lot of truth to it. A recent article from Financial Advisor entitled “Estate Planning In This Particular Time of Uncertainty” offers strategies and estate planning techniques to be considered during these volatile times.

Gifting Assets into Irrevocable Trusts to Benefit Family Members. If done correctly, this serves to remove the current value and all future appreciation of these assets from your estate. With the federal estate tax exemption ending at the end of 2025, the exemption will drop from $12.06 million per person to nearly half that amount.

Combine this with a time of volatile asset prices and it becomes fairly obvious: this would be a good time to take investments with a lowered value out of the individual owner’s hands and gift them into an irrevocable trust. The lower the value of the asset at the time of the gift, the less the amount of the lifetime exemption that needs to be used. If assets are expected to recover and appreciate, this strategy makes even more sense.

Spousal Limited Access Trust (SLAT). This may be a good time for a related technique, the SLAT, an irrevocable trust created by one spouse to benefit the other and often, the couple’s children. Access to income and principal is created during the spouse’s lifetime. It can even be drafted as a dynasty trust. Assets can be gifted out of the estate to the trust and while the grantor (the person creating the trust) cannot be a beneficiary, their family can. Couples may also create reciprocating SLATs, where each is the beneficiary of the other’s trust, as long as they are careful not to create duplicate trusts, which have been found invalid by courts. Talk with an experienced estate planning attorney about how a SLAT may work for you and your spouse.

What about interest rates? A Grantor Retained Annuity Trust (GRAT), where the grantor contributes assets and enjoys a fixed annuity stream for the life of the trust, may be advantageous now. At the end of the trust term, remaining assets are distributed to family members or a trust for their benefit. To avoid a gift tax on the calculated remainder, due when the trust is created, most GRATs are “zeroed out,” that is, the present value of the annuity stream to the grantor is equal to the amount of the initial funding of the trust. Since you get back what’s been put in, no taxable gift occurs. The lower the interest rate, the higher the value of the income stream. The grantor can take a lower annuity amount and with decent appreciation of assets in the trust, there will be a larger amount as a remainder for heirs. Interest rates need to be considered when looking into GRATs.

Qualified Personal Residence Trust (QPRT) is a trust used to transfer a primary residence to beneficiaries with minimal gift tax consequences. The grantor retains the right to live in the house at no charge for a certain period of time. After the time period ends, the property and any appreciation in value passes to beneficiaries. The valuation for the value of the initial transfer into the trust for gift tax purposes is determined by a calculation relying heavily on interest rates. In this case, a higher interest rate results in a lower present value of the remainder and a lower gift value when the trust is created.

Reference: Financial Advisor (July 8, 2022) “Estate Planning In This Particular Time of Uncertainty”

How Does Gift Tax Exclusion Work?

“In 2022, the annual exclusion for Federal Gift Taxes increased to $16,000 per person per year. Although there is near-universal acceptance of the importance of gifting, there are several issues you should consider before making any gifts.”

How gifts are made could have major impacts on heirs, especially if the recipient is a minor. There are many drawbacks to gifting outright, including limited control over gifts, exposure to creditors, divorce and litigation. Trust options are the recommended strategy, as discussed in the article “The Annual Exclusion For Gift Taxes Has Increased to $16,000—What Issues Should I Consider” from Mondaq.

When gifting directly to minors, a custodial account (ITMA) offers some structure. However, if the account terminates when the minor becomes of age, you then have a young person with no control and a lot of money. This is usually a bad combination.

For example, what if the annual exclusion gift of $16,000 is placed into a custodial account when the heir is nine and ends when the heir celebrates their 18^th birthday? Even if the account earns no interest, by the time the heir reaches age 18, they will have complete access to $160,000 with no restrictions.

If there is a change to the custodian before the minor comes of legal age, the UTMA allows a primary custodian to name a successor. However, if this does not happen, the process of naming a successor custodian is generally burdensome and expensive.

Trust options or a transfer to a 529 plan are better options offering a lot more control by a trustee. Trusts allow assets to be used for a variety of needs, while the 529 plan limits withdrawals to be used for educational needs. The trustee may also continue to manage the account long after the heir has reached legal age, which to most people makes good sense.

Another option is a Section 2503(c) Minors Trust, which can be used for annual exclusion gifts to minors. They require that assets of the trust be applied for the minor who is a beneficiary of the trust. However, there are limited exceptions. There can only be one beneficiary and they must be under age 21. When the beneficiary turns twenty-one, they must be given the ability to withdraw the assets. However, any assets remaining in the trust can be kept in the trust and the trust itself can be converted into another form of irrevocable trust, allowing for continued annual exclusion gifts to be made for the beneficiary.

For more control, consider an irrevocable gift trust. The IGT can be used for the annual exclusion gift and is a smart choice for gifts greater than the annual exclusion when a Gift Tax Return is required. The person creating the irrevocable gifting trust appoints the trustees and should name alternates, if the primary trustee is unable to serve. The trustee then has discretion to manage the assets, including over distributions. Unlike a 2503(c) Minor Trust, the irrevocable gifting trust does not have to terminate or permit unrestricted access to income or principal.

Reference: Mondaq (March 2022) “The Annual Exclusion For Gift Taxes Has Increased to $16,000—What Issues Should I Consider”

Is Estate Tax Exemption Going to Change?

“The new numbers mean that wealthy taxpayers can transfer more to their heirs tax free during life—or at death. A lot more.”

In 2022, the estate and gift tax exemption increases from $11.7 million in 2021 to $12.06 million per individual, according to new inflation-adjusted numbers from the IRS. The gift tax annual exclusion also increases, from $15,000 to $16,000. The IRS announced these numbers, as well as tax brackets, standard deductions and more, as reported in the article “New Higher Estate And Gift Tax Limits for 2022: Couples Can Pass On $720,000 More Tax Free” from Forbes.

The estate tax is 40% on the biggest estates, but wealthy individuals use legal strategies, like transferring wealth to heirs while they are living, making big gifts and also making multiple $16,000 annual exclusion gifts that don’t count against the $12 million lifetime limit.

In 2022, a wealthy person may leave $12.06 to heirs with no federal estate or gift tax. A married couple may leave $24.12 million. If by some chance a couple has maxed out their lifetime gifts, this latest increase means they have the option to give away another $720,000 in 2022.

A series of annual exclusion gifts of $16,000 can add up, especially when they are done in a planned method over an extended period of time. Since these gifts don’t count toward the $12 million amount, they are especially valuable for managing estate tax liability.

Estate sizes may also be reduced by making direct payments for medical and tuition expenses, for as many people as desired, with no gift or tax consequences. There is no limit on the amount to be paid, as long as these payments are made directly to the institution.

There are any number of ways to take money out of an estate. These include outright gifts, loans to family members and special trusts. A variety of trusts are created to preserve family wealth, from simple to complex trusts used to extend wealth across many generations.

In addition to planning for the increased numbers for 2022, this is also the time to check on basic estate planning documents and be certain they are up to date. These includes a will, any kind of revocable living trust, a durable power of attorney, a healthcare directive and a living will. If the family includes a special needs member or a disabled individual, there are other planning methods to be discussed with an experienced estate planning attorney.

Despite the good news of these increases, the $12 million estate tax exemption will be halved at the start of 2026. The historical high exemption was created under President Donald J. Trump by the 2017 Tax Cuts and Jobs Act, which temporarily doubled the estate tax exemption from 2018 to 2025. While there was a lot of discussion about the Infrastructure Bill and funding through estate taxes, any provisions impacting estate planning were dropped before the bill was passed.

One more reason to gift now: state estate taxes and inheritance taxes are still alive and well in many states. If you live in a state with these taxes, the state tax bite could be just as bad, if not worse, than the federal tax.

Reference: Forbes (Nov. 11, 2021) “New Higher Estate And Gift Tax Limits for 2022: Couples Can Pass On $720,000 More Tax Free”

Before They’re Gone—Estate Planning Strategies

“If you have not already been inundated with invitations to webinars, articles and newsletters regarding the estate planning you should consider doing before new legislation passes, you undoubtedly will receive these over the next few months.”

As Congress continues to hammer out the details on impending legislation, there are certain laws still in effect concerning estate planning. The article “Last Call for SLATs, GTRATs, and the Use of the Enhanced Gift Tax Exemption?” from Mondaq says now is the time to review and update your estate plan, just in case any beneficial strategies may disappear by year’s end.

Here are the top five estate planning items to consider:

Expect Exemptions to Take a Dive. Estate, gift, and generation-skipping transfer tax exemptions are $11.7 million per person and are now scheduled to increase by an inflationary indexed amount through 2025. Even if there are no legislative changes, on January 1, 2026, this number drops to $5 million, indexed for inflation. Under proposed legislation, it will revert to $6,020,000 and will continue to be indexed for inflation. This is a “use it or lose it” exemption.

Married Couples Have Options Different Than Solos. Married persons who don’t want to gift large amounts to descendants have the option to gift the exemption amount to their spouse using a SLAT—Spousal Lifetime Access Trust. The spouses can both create these trusts for each other, but the IRS is watching, so certain precautions must be taken. The trusts should not be identical in nature and should not be created at the same time to avoid application of the “reciprocal trust” doctrine, which would render both trusts moot. Under proposed legislation, SLATs will be includable in your estate at death, but SLATs created and funded before the legislation is enacted will be grandfathered in. If this is something of interest, don’t delay.

GRATs and other Grantor Trusts May be Gone. They simply won’t be of any use, since proposed legislation has them includable in your estate at death. Existing GRATs and other grantor trusts will be grandfathered in from the new rules. Again, if this is of interest, the time to act is now.

IRA Rules May Change. People who own Individual Retirement Accounts with values above $10 million, combined with income of more than $450,000, may not be able to make contributions to traditional IRAs, Roth IRAs, and defined contribution plans under the proposed legislation. Individuals with large IRA balances may be required to withdraw funds from retirement plans, regardless of age. A minimum distribution may be an amount equal to 50% of the amount by which the combined IRA value is higher than the $10 million threshold.

Rules Change for Singles Too. A single person who doesn’t want to make a large gift and lose control and access may create and gift an exemption amount to a trust in a jurisdiction with “domestic asset protection trust” legislation and still be a beneficiary of such a trust. This trust must be fully funded before the new legislation is enacted, since once the law passes, such a trust will be includable in the person’s estate. Check with your estate planning attorney to see if your state allows this strategy.

Reference: Mondaq (Sep. 24. 2021) “Last Call for SLATs, GTRATs, and the Use of the Enhanced Gift Tax Exemption?”

Gift-Tax Exemptions are Treated Differently by IRS and Medicaid

“Most people have heard that each individual is allowed to gift $15,000 per year to another person without paying a gift tax. However, exactly what the gift tax is, and the consequences of going beyond $15,000, are less clear.”

Different government agencies have different rules for the same things. It’s a hard lesson, especially for those who try to use their $15,000 annual gift tax exclusion for asset protection for long term care. The results are not good.

A recent article from The News Enterprise makes it clear: “Medicaid and IRS don’t view gift-tax-exemption in same way.”

To understand the exclusion better, let’s start by looking at what the amount is being excluded from. The IRS generally allows each person to gift a total of $11.7 million in gifts during their lifetime and after death without incurring a gift tax. There are exceptions, but this is true in most cases. However, that first $15,000 given to each person within each calendar year is excluded from the total amount.

If a woman gives her three children $15,000 each per year for five years, she has given away a total of $225,000. However, this amount is not deducted from the $11.7 million that she is allowed within her lifetime non-taxable gift amount.

However, if the same woman gave her children $16,000 each for five years, the extra $3,000 per year must be deducted from her lifetime non-taxable gift limit. Unless she reaches the $11.7 million after her death, her estate will still not pay taxes on the gifts. She will be required to file a form every year letting the IRS know that she is reducing her limit.

The $15,000 exclusion each year simplifies the ability to give gifts without cumbersome reporting requirements. However, it creates huge—and costly—problems when used in an attempt to become eligible for Medicaid. This federally funded program was created to help low-income people pay for medical and nursing home care. A person’s assets and any financial transactions made within a five-year lookback period are considered when determining eligibility.

What most people don’t know is that Medicaid does not allow the gift tax exclusion to be used for the lookback period.

Remember the woman who gave her three children $15,000 each year for five years? If she goes into a nursing facility in the fifth year, after giving her final set of gifts, the IRS won’t count any of those gifts made against her lifetime gift tax exemption. However, Medicaid will count the full amount—$225,000—as if those assets were available to pay for her care. The penalty period will make it necessary for her or her family to pay for care, possibly for five years.

To take advantage of the annual gift tax exclusion safely when Medicaid may be in the future, an estate planning attorney can create an Intentionally Defective Grantor Trust to hold assets. This is a hybrid trust used to separate assets from the grantor just enough to begin the five-year lookback period while holding property within the grantor’s taxable estate, allowing for a continuing opportunity to take advantage of the annual gift tax exclusion without triggering a new five-year look back at each gift.

The IRS and Medicaid work under different rules and understanding what each agency requires can protect the family and those needing nursing home care without creating expensive and stressful results. In addition, some Medicaid planning techniques may work in some states but not in others.

Reference: The News Enterprise (Sep. 14, 2021) “Medicaid and IRS don’t view gift-tax-exemption in same way”

 

How to Protect an Estate from a Rotten Son-in-Law

“Whatever the reason, whether your life is a bed of roses or a getting-worse-nightmare, there are things you can do now to insure what you leave will go to who you want. And when. And in what portion or portions.”

If you’ve been working for a while, you have an estate. If you’ve been working for a long time, you may even have a sizable estate, and between your home, insurance and growing retirement funds, your estate may reach the million dollar mark. That’s the good news. But the bad news might be an adult child with a drug or drinking problem, or a child who married a person who doesn’t deserve to inherit any part of your estate. Not to mention an ex-spouse or two. What will happen when you aren’t there to protect your estate?

There are steps to protect your estate and your family members, as described in the recent article “Is your son-in-law a jerk? Armor plate your estate” from Federal News Network.

Don’t overlook beneficiary designations. Most employer-sponsored retirement and savings accounts have beneficiary designations to identify the people you wish to receive these assets when you die. Here’s an important fact to know: the beneficiary designation overrides any language in your last will and testament. If your beneficiary designation on an account names a child but your will gives your estate to your spouse, your child will receive assets in the account, and your spouse will not receive any proceeds from the account.

Don’t try to sell a property for below-market value. The same goes for trying to remove assets from your ownership to qualify for Medicaid to cover long-term care costs. Selling your home to an adult child for $1 will not pass unnoticed. Estate taxes, gift taxes, income taxes and eligibility for government benefits can’t be avoided by this tactic.

A common estate planning mistake is to name specific investments in a will. A will becomes part of the public record when it is probated. Providing details in a will is asking for trouble, especially if a nefarious family member is looking for assets. And if the sale or other disposition of the named asset before your death impacts bequests, your estate may be vulnerable to litigation.

How will you leave real estate assets to heirs? Real estate assets can be problematic and need special consideration. Are you leaving shares to a vacation home or the family home? If kids or their spouses don’t get along, or one person wants to live in the home while others want to sell it, this could cause years of family fights.

Making a bequest to a grandchild instead of to a troubled adult child. Minor children may not legally inherit property, so leaving assets to a grandchild does not avoid giving assets to an adult child. The most likely guardian will be their parent, undoing the attempt to keep assets out of the parent’s control.

Include a residuary clause in a will or trust. Residuary clauses are used to dispose of assets not specifically mentioned in a will or trust. Your estate planning attorney will create the residuary clauses most appropriate for your unique situations.

Prepare for the unexpected. Your estate plan can be designed to address the unexpected. If a primary beneficiary like a daughter or son divorces their spouse, a trust could prevent the ex from gaining access to your assets.

An effective estate plan, prepared with an experienced estate planning attorney, can plan for all of the “what ifs” to protect loved ones after you have passed.

Reference: Federal News Network (Sep. 1, 2021) “Is your son-in-law a jerk? Armor plate your estate”

Who Pays the Tax on a Special Needs Trust?

 

“The main financial vehicles of supporting disabled individuals—the special needs trust and the Achieving a Better Life Experience (ABLE) account—both come with special tax conditions that advisors need to consider.”

One of the reasons to use a Special Needs Trust (SNT) or open an ABLE account is to prevent federal or state benefits for a disabled person to be put at risk. The SNT is a way to hold property for someone without interfering with their eligibility. However, there are no tax advantages to the trust, according to a recent article titled  “How To Factor In Taxes When Considering Special Needs Trusts, Accounts” from Financial Advisor.

Tax results depend on who creates the trust, the terms of the trust and how it’s administered. The trust pays no taxes on any income it earns, as long as that income is passed on to the beneficiary. Trust tax rates are generally higher than individual tax rates. The income to the beneficiary will be taxable at their income tax rate. In some cases, all of the income of a trust might be taxed to the beneficiary, while in others the parent or person who created the trust might bear a tax burden, or the trust itself may be responsible for the tax liability.

An ABLE account is also a tax-favored vehicle, similar to a 529 college saving account. For a person to qualify for an ABLE account, they must have a disability that began before age 26 or be a recipient of Supplemental Security Income (SSI) or Social Security disability insurance benefits or meet other disability requirements.

The ABLE account will not reduce the major part of SSI benefits under the dollar-for-dollar SSI direct support rules, and it won’t be counted as an asset. The disabled person may also use their ABLE account to save earned income. The ABLE account can be inherited, and new rules allow funds in a 529 college savings account to be rolled into an ABLE account.

You can only contribute $15,000 a year to most ABLE accounts, and if the account plus other resources exceeds $100,000, SSI benefits will be suspended. These accounts must be managed carefully to protect eligibility.

The ABLE account varies, depending on the requirements and rules of the state where it is established. Some states offer additional tax benefits, if the person uses the ABLE accounts offered by their home state.

Depending on the state where you open the account, there can be deductions for contributions to an ABLE account. Earnings in the account are generally not subject to taxes, but the funds in the ABLE account may only be used tax-free for qualified expenses that result from living with a disability. Those include education, housing, employment training and special assistance.

The ABLE account is a useful financial tool for disabled individuals, but it does not completely replace a Special Needs Trust or trust planning.

When there are substantial funds, such as those from an inheritance, litigation settlement or a major gift, most estate planning attorneys recommend that those funds go into a Special Needs Trust.

Reference: Financial Advisor (July 12, 2021) “How To Factor In Taxes When Considering Special Needs Trusts, Accounts”

How Do You Split Estate in a Blended Family?

A second marriage can be a balm for the heartache of losing a spouse, be it through death or divorce. Nevertheless, if there are children or other heirs involved, you should consider carefully what will happen with your money and possessions when you pass on.”

When it comes to blended families and estate planning, there are no guarantees, especially concerning estate planning. However, there are some classic mistakes to avoid, reports this recent article from AARP titled “Remarried With Children? 5 Estate Planning Mistakes to Avoid.”

Most people mean well. They want to protect their spouses and hope that their heirs will share in any proceeds when the second spouse dies. They want all the children to be happy. They also hope that the step siblings will still regard each other as “siblings” after the parents are passed. However, there are situations where children get shut out of their inheritance or an ex-spouse inherits it all, even if that wasn’t the plan. Here are five mistakes to avoid:

#1: Not changing named beneficiaries. People neglect to update their wills and beneficiary designations. This is something to do immediately, before or after the wedding. By changing the name of the beneficiary on your 401(k), for instance, it passes directly to the surviving spouse without probate. All financial accounts should be checked, as should life insurance beneficiaries. You can designate children as secondary beneficiaries, so they receive assets, in the event that both parents die.

While you’re doing that, update legal directives: including the medical power of attorney and the power of attorney. That is, unless you’d like your ex to make medical and financial decisions for you!

#2 Not updating your will. Most assets pass through the will, unless you have planned otherwise. In many second marriages, estate planning is done hoping the spouse inherits all the assets and upon their death, the remaining assets are divided among all of the children. There is nothing stopping a surviving spouse from re-writing their will and for the late spouses’ children to be left without anything from their biological parent. An estate planning attorney can explore different options to avoid this from occurring.

#3 Treating all heirs equally. Yes, this is a mistake. If one person came to the marriage with significantly more assets than another, care must be taken if the goal is to have those assets remain in the bloodline. If one person owned the house, for instance, and a second spouse and children moved into the house, the wish might be to have only the original homeowner’s children inherit the proceeds of the sale of the house. The same goes for pension and retirement accounts.

#4 Waiting to give until you’ve passed. If you are able to, it may be worth gifting to your heirs while you are still living, rather than gifting through a will. You may give up to $15,000 per person or $30,000 to a couple without having to pay a federal gift tax. Recipients don’t pay tax on most gifts. Let’s say you and your spouse have four children and they are all married. You may give each child and their spouse $30,000, without triggering any taxes for you or for them. It gets better: your spouse can also make the same size gift. Therefore, you and your spouse can give $60,000 to each couple, a total of $240,000 per year for all eight people and no taxes need be paid by anyone. This takes assets out of your estate and is not considered income to the recipients.

#5 Doing it yourself. If you’re older with a second marriage, ex-spouses, blended families and comingled assets, your estate planning will be complicated. Add a child with special needs or an aging parent and it becomes even more complex. Trying to create your own estate plan without a current and thorough knowledge of the law (including tax law) is looking for trouble, which is what you will leave to your children. The services of an estate planning attorney are a worthwhile investment, especially for blended families.

Reference: AARP (July 9, 2021) “Remarried With Children? 5 Estate Planning Mistakes to Avoid”

How to Prepare for Higher Taxes

“President Biden’s proposal to eliminate the step-up for calculating inheritance taxes targets a tactic that has long been a wealth-preservation tool. What are some of the ramifications of the proposal and what, after political wrangling, could be the tax implications for large inherited assets?”

Taxing the appreciation of property on gifting or at death as capital gains or ordinary income is under scrutiny as a means of raising significant revenue for the federal government. The Biden administration has proposed this but proposing and passing into law are two very different things, observes Financial Advisor in the article “How Rich Clients Should Prepare For A Biden Estate Tax Regime.”

The tax hikes are being considered as a means of paying for the American Jobs Act and the American Families Act. Paired with the COVID-19 relief bill, the government will need a total of $6.4 trillion over the course of a decade to cover those costs. Reportedly, both Republicans and Democrats are pushing back on this proposal.

A step-up in basis recalculates the value of appreciated assets for tax purposes when they are inherited, which is when the asset’s value usually is higher than when it was originally purchased. For the beneficiary, the step-up in basis at the death of the original owner reduces the capital gains tax on the asset. Taxes are reduced significantly, or in some cases, completely eliminated.

For now, taxpayers pay an estate tax on the value of the assets and the basis of appreciated assets is stepped up to fair market value. The plan under consideration would treat appreciated assets owned at the time of death as sold, which would trigger income tax and subject those assets to estate tax.

Biden’s proposal would also subject many families to the estate tax, which they would not otherwise face, since the federal estate tax exclusion is still historically high—$11.7 million for individuals and $23.4 million for married couples. Let’s say a widowed mother dies with a $3 million estate. Most of the value of the estate is the home she lived in with her spouse for the last four decades. Her estate would not owe any federal tax, but the deemed sale of a highly appreciated home would generate income tax liability.

The proposal allows a $1 million per individual and $2 million per married couple exclusion from gain recognition on property transferred by gift or owned at death. The $1 million per person exclusion is in addition to exclusions for property transfers of tangible personal property, transfers to a spouse, transfers to charity, capital gains on certain business stock and the current exclusion of $250,000 for capital gain on a personal residence.

How should people prepare for what sounds like an unsettling proposal but may end up at a completely different place?

For some, the right move is transferring properties now, if it makes sense with their overall estate plan. Regardless of what Congress does with this proposal, the estate tax exemption will sunset to just north of $5 million (due to inflation adjustments) from the current $11.7 million. However, the likelihood of the proposal passing in its present state is low. The best option may be to make any revisions focused on the change to the estate tax exemption levels.

Reference: Financial Advisor (June 28, 2021) “How Rich Clients Should Prepare For A Biden Estate Tax Regime”