You have to be prepared to adjust your estate plan when circumstances evolve. There can be additions and subtractions to your family, marital status changes, and your financial status can improve considerably.
Legislative measures that are related to estates can also enter the picture, and two pieces of legislation are making their way through Congress right now that fit this description.
Sensible Taxation and Equity Promotion (STEP) Act
The first bill that we will look at here is the STEP Act that would alter the guidelines for inherited appreciated assets.
Right now, if you inherit assets that appreciated while the person that left you the inheritance was living, they would get a stepped-up basis for capital gains purposes. The basis would be equal to the value at the time that you acquire the assets.
As a result, you would not pay capital gains taxes on the appreciation, but you would be responsible for future gains that are realized.
Very high net worth individuals that are in possession of stock and other appreciated assets can use the stepped-up basis to transfer enormous generational wealth tax-free. The STEP Act would close this window of opportunity.
You would be able to use the step-up in basis for the first $1 million, so it would not impact the vast majority of Americans. The rest would be subject to the capital gains tax.
At the present time, the maximum long-term rate is 20 percent for people that are in the highest income bracket. President Biden has proposed an increase to 39.6 percent, so these potential changes are a big deal for individuals that would like to take advantage of the step-up in basis.
For the 99.5 Percent Act
Senator Bernie Sanders of Vermont is a vocal critic of the “one percent” of Americans that are in possession of a disproportionate share of the wealth. He has introduced the For the 99.5 Percent Act in an effort to claw back some of that wealth.
The federal estate tax can be levied on the portion of an estate that exceeds the exclusion. A $5 million exclusion was established for 2011 when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act was enacted in December of 2010.
This figure remained in place through a series of subsequent tax acts with annual indexing for inflation. In 2017, it was $5.49 million, but the new administration guided the Tax Cuts and Jobs Act through the legislative process during that year.
It raised the exclusion to $11.18 million for 2018, there have been inflation adjustments since that time. During the current calendar year, the federal estate tax exclusion is $11.7 million, and the top rate is 40 percent.
This measure would reduce the exclusion to $3.5 million, and the rate would go up to 45 percent for the first $10 million. It would graduate from there, and estates valued at more than $1 billion would be taxed at a maximum rate of 65 percent.
The estate tax is unified with the gift tax, so the $11.7 million exclusion that we have this year is a unified exclusion. This means that you could give $11.7 million in tax-free gifts while you are living.
Under a provision contained in the For the 99.5 Percent Act, lifetime gift giving using the unified exclusion would be limited to $1 million.
In addition to this exclusion, there is a separate annual exclusion. You can use it to give as much $1500 to any number of people tax-free each year. Many high net worth individuals use it to fund irrevocable trusts or family limited partnerships.
This measure would put a $30,000 per donor ceiling on gifts to irrevocable trusts and certain flow-through entities like family limited partnerships.
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We can help you take the right steps to mitigate the damage if these potential changes will impact your estate. And of course, we can work with you to develop a custom crafted plan if you have no reason to be concerned about taxation.
You can schedule a consultation at our Naperville, Illinois estate planning office if you call us at 630-568-8611, and you can use our contact form if you would rather send us a message.