| (803) 791-1111 | CLIENT LOG IN
Most Americans today don’t have to worry about paying estate taxes because the value of their estates falls below the estate and gift tax exemption. For example, only about 1,900 estates had to pay federal estate taxes in 2020, which represents the estates of fewer than 0.1 percent of the
approximately 2.8 million people who died last year.
In contrast, more than 50,000 estates paid the federal estate tax in 2001 when the estate tax exemption was much lower. All of this could soon change, however, if the tax plan released by House Democrats in September becomes law.
This plan would reverse the increase in the estate and gift tax exemption that was part of the Tax Reform Act of 2017. If enacted, the plan would lower the exemption from the current $11.7 million per person (or $23.4 million for a married couple) in 2021 to around $6 million per person (or around $12 million for a married couple), effective at the beginning of 2022. The value of estates above the exemption amount would be subject to federal estate tax of 40%.
Lowering the exemption to this level could triple the number of estates that are subject to the tax, according to estimates from the Tax Policy Center.
The good news is that House Democrats’ tax plan does not include some estate tax changes that had been proposed by the Biden administration. Perhaps the most important was the proposed removal of a step-up in cost basis for inherited assets on the day when the asset owner dies.
The Biden administration’s proposal would have removed this step-up in cost basis for any capital gains on inherited assets that exceed $1 million (or $2 million for assets inherited from married couples) when they’re sold. This could have resulted in severe tax consequences for heirs receiving property that has appreciated significantly in value. The step-up in basis currently saves taxpayers $41 billion per year, estimates the Joint Committee on Taxation.
According to a senior policy analyst at the Tax Foundation, the fact that the House plan doesn’t remove the step-up in cost basis suggests that members are concerned about how this would negatively affect family businesses and farms.
Another bit of good news is the fact that the lower gift and estate tax exemption wouldn’t take effect until the beginning of 2022. This gives wealthy families until the end of this year to make gifting decisions that could result in significant tax savings for heirs. Also, the House plan leaves
the estate tax rate at a flat 40%. The Biden proposal would have implemented a progressive scale that raised the estate tax rate to between 45% and 65%, depending on the value of the estate.
In addition to lowering the gift and estate tax exemption amount, the Democrats’ proposed tax plan would eliminate or limit the use of some popular gifting and estate planning tools used by wealthy individuals and families to reduce estate taxes. These include irrevocable life insurance trusts, grantor trusts, Grantor Retained Annuity Trusts (GRATs), Qualified Personal Residence Trusts (QPRTs) and Charitable Lead Annuity Trusts (CLATs).
These trusts may have different and ineffective tax results if they are established or funded after the legislation is enacted. Therefore, if you are planning to establish and fund these trusts sometime in the near future, it might make sense to do so before the end of this year. Also consider accelerating any planned future gifts into the current year if you can.
The Biden administration’s proposals contained a number of other provisions that didn’t make it into the House’s proposed tax plan. For example, it would have lowered the $15,000 (or $30,000 for a married couple) that can currently be given away annually free of federal gift tax to just
$10,000 (or $20,000 for a married couple) and imposed a $20,000 limit on the total amount of gifts that can be given to anyone in a trust or involving family entities.
It also would have implemented a capital gains tax on estates upon the death of asset owners, decreased the lifetime gifting allowance to as low as $1 million and removed valuation discounts (such as for lack of marketability or lack of control) for any non-business entity holdings.
Legislation affecting estate tax planning is still very fluid and things could change at any time, especially once the Senate gets involved. We will continue to keep you abreast of the latest developments.
In the meantime, feel free to contact us (803) 791-1111 or info@longleafadv.com if you have questions about your specific situation.
Thank you!
Please try again.
Investment Advisory Representatives offer advisory products and services through Longleaf Advisory Services, LLC, a Registered Investment Advisor.
171 Lott Court
West Columbia, SC 29169
All Rights Reserved | Longleaf Advisors
Investment Advisory Representatives offer advisory products and services through Longleaf Advisory Services, LLC, a Registered Investment Advisor.