Estate taxes can have a significant impact on what your beneficiaries receive, and recent changes (and speculation about changes) to tax law make now a good time to review your estate planning.
Recent legislative proposals under the Biden administration have made some people concerned that estate and gift tax changes could impact a broad range of families. In one example, the “For the 99.5% Act” proposes major changes to taxes for gift, estate and generation-skipping transfer taxes. It also includes an increase in gift and estate tax rates.
While it’s impossible to foresee tax laws of the future, it’s important to consider certain outcomes so that you can best plan for your family.
Here’s where current federal estate- and gift-tax exemptions sit: For 2021, the exemption is $11.7 million per individual and $23.4 million per married couple. If your estate is worth more, you’ll pay tax on the amount over that threshold. The top estate tax rate is 40%. As far as capital gains go, investment assets that are held at death aren’t subject to capital gains tax.
Many experts believe that changes proposed by the current administration won’t garner easy support, but there’s no doubt the concept of reduced transfer tax exemptions has some momentum. In light of the proposed changes, here are a few things to think about.
Plan your irrevocable life insurance trust (ILIT) carefully
An ILIT is a powerful estate planning tool that allows you to create and manage life insurance policies and handle distribution of funds upon your death — and currently without a huge estate tax bill. But the provision of one proposal will end Grantor Trust-type estate planning, so an ILIT must be carefully executed if it’s to still provide shelter from estate taxation for life insurance proceeds. Having an ILIT in place and funded with at least a modest gift will make it possible for you to quickly facilitate making gifts should a sudden change in legislation occur.
Make large gifts now
For 2021, the annual gift tax exclusion is $15,000 per donor, per recipient. Making gifts that are in excess of the exemptions might be desirable for some, because the effective gift tax rate is lower than the estate tax rate (that’s if you live at least three years after the gift). Plus, if we see higher gift and estate tax rates later, it may be preferable to pay gift tax now.
Gift high-value assets that have a low tax basis
If you have real estate or other illiquid assets that have appreciated substantially in value and you intend for your children to inherit them, consider gifting that asset to them during your lifetime instead. This will remove any later appreciation from being subject to estate taxes.
Give money to charity
Donating charitable funds works much in the same way as gifting to family. The $15,000 limit per donor, per recipient, still applies. You can also set up a charitable trust, either a remainder trust or a lead trust. These work by assigning hard assets, investments or cash from your estate as charitable donations. A donor advised fund, or DAF, also allows you to grow investments tax free for the purpose of donating those funds to charity.
Work with your wealth advisor and tax professional
Your financial advisor and tax professional should work together and work with you to help you maximize your estate plan. They can help ensure that any strategies or techniques yield the best results.
At Ironwood Wealth Management, we’re here to help you do exactly that: Devise a comprehensive financial plan implementing the tax strategies that are best for your situation. Contact us to learn more.