With President-elect Joe Biden in the wings to take office in January, there is much uncertainty surrounding what the law will be for death taxes in the next year.
What happens next? The reality TV show continues…
The Democratic Party platform proposes to return federal estate taxes to their historic norms, taxpayers need to act now before Congress passes legislation that could adversely impact their estates. Currently, the federal estate and gift tax exemption is set at $11.58 million per taxpayer. Assets included in a decedent’s estate that exceed the decedent’s remaining exemption available at death are taxed at a federal rate of 40 percent (with some states adding an additional state estate tax). The proposal is to reduce the tax exemption to 3.5 million.
It is yet unclear who will control the Senate, as the balance of votes there will come down to a Georgia runoff in early January. Aren’t you glad you don’t live there right now? If the election results in a complete political party change, it could mean not only lower estate and gift tax exemption amounts (which will affect the wealthy) but also the end of the longtime taxpayer income tax benefit that will affect middle-class families: Ending an adjusted basis at death.
Stepped-Up Basis
If I buy a stock for $10 and sell it for $100, I will owe some tax on that $90 increase, called a capital gain. The rate might be 15% (going up) and a state income tax, which for Maryland I estimate at 7%. On a $90 gain, I owe $21. The $10 purchase price is the “Basis”, or measuring point of the gain.
If I die (I will) those inheriting this stock from me would get it as if they bought it the day I died. The basis “adjusts”, by stepping up from $10 to $100 due to my death. Why? Because it is subject to death taxes if I have enough money.
This occurs with real estate, including rental property and many investments. Not IRAs or accrued bond interest.
Due to the current high death tax exemptions, most people will not pay death taxes, unless the rules change. Ending the adjusted basis will affect the children of most of my clients.
I know this is a little bit complicated. If I haven’t lost you completely, at least be aware that the tax law changes aren’t just about somebody else.
If the death taxes do change we will follow up in this newsletter. Stay tuned. Some thoughts for those who may want to act before January 1 to take advantage of the high death tax exemption. Other than dying before then consider these:
Irrevocable Life Insurance Trust
An existing insurance policy can be transferred into an irrevocable life insurance trust (ILIT), or the trustee of the ILIT can purchase an insurance policy in the name of the trust. The donor can make gifts to the ILIT that qualify for the annual gift tax exclusion, and the trustee will use those gifts to pay the policy premiums. Since the insurance policy is held by the ILIT, the premium payments and the full death benefit are not included in the donor’s taxable estate. Furthermore, the insurance proceeds at the donor’s death will be exempt from income taxes.
Gifting
The current tax exemption of 11.58 million per taxpayer is a unified credit for both estate and gift taxes, meaning that you can gift up to that amount now without owing gift taxes. If you give someone more than $15000 in a given year, you generally must file a gift tax return. However, the credit tax is not owned unless you exceed the current very high exemption amount. Simply completing the gift before December 31 and then filing a gift tax return by April 15 is a simple alternative.
When Should I Talk to an Estate Planner?
If any of the strategies discussed above interest you, or you feel that potential changes in legislation will negatively impact your wealth, we strongly encourage you to schedule a meeting with us at your earliest convenience and definitely before the end of the year. We can review your estate plan and recommend changes and improvements to protect you from potential future changes in legislation.
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