The COVID-19 pandemic has placed our lives into an extended state of suspended animation in many ways. We have been forced to put certain responsibilities on the back burner, but now that there is widespread vaccine availability, the great thaw is happening before our eyes.
From an estate planning perspective, it is time to revisit your plan with an attorney so you can make the necessary revisions. In addition to the fact that there is no reason to procrastinate any longer, there are some specific reasons why action is required right now.
Estate Tax Changes
Your legacy can be heavily impacted by the federal estate tax because it carries a 40 percent top rate. The exclusion is the amount that can be transferred before the estate tax would be applied on the remainder, and it is at a record high.
At the end of 2017, the Tax Cuts and Jobs Act was enacted, and it essentially doubled the estate tax exclusion for 2018. It went from $5.49 million to $11.18 million. After a series of inflation adjustments, the exclusion sits at $11.7 million in 2021.
The provision in the aforementioned piece of legislation that set the exclusion is going to expire or sunset on January 1, 2026. If there are no changes in the meantime, the exclusion will revert back to the $5.49 million that we had in 2017 before the change went into effect.
That’s bad enough for high net worth individuals, but the For the 99.5% Act that has been introduced by Senator Bernie Sanders would shave it down to $3.5 million. The rate would go from 40 percent to 45 percent for estates valued at $10 million or less, and it would go up from there with a max of 65% on estates valued at more than $1 billion.
There is a gift tax that is unified with the estate tax, so this exclusion applies to large lifetime gifts and your estate. The measure that Sanders is pushing would separate the two, and the gift tax exclusion would go down to just $1 million.
Clearly, wealthy Americans need to take action while the parameters are still favorable. We can help you take the right steps between now and 2026 to mitigate your exposure in the best possible way based on your unique financial situation.
Elimination of Stepped-Up Basis
Traditionally, when appreciated assets are being transferred after someone dies, the resources get a stepped-up basis. This means that the capital gains meter start anew when assets are inherited; the inheritor would not be responsible for gains that accumulated during the decedent’s life.
Many people use this loophole to transfer significant wealth in a tax-free manner, and there are estate plans that rely on it. President Biden has proposed an elimination of the stepped-up basis with a $1 million exemption. He would also raise the long-term rate from 20 percent to 39.6 percent.
This is a serious proposal that is actively on the table, so you should definitely work with an estate planning attorney to discuss the appropriate adjustments if you will be passing along valuable appreciated assets.
SECURE Act 2.0
On December 20th of 2019, the SECURE Act was enacted. It made changes to certain important individual retirement account guidelines. One of them was an increase in the mandatory distribution age for traditional account holders. It went from 70.5 years of age to 72.
On the estate planning front, it eliminated a very effective strategy called the “stretch IRA.” Beneficiaries of individual retirement accounts are required to take annual mandatory minimum distributions, and in the past, they could stretch them out for as long as possible.
This enabled them to maximize the tax benefits. The SECURE Act included a provision that requires account beneficiaries to clear out and close their accounts within 10 years.
As we have recently reported, there is another bill making its way through the House of Representatives that is called the Securing a Strong Retirement Act of 2021. Many people refer to this piece of legislation as SECURE Act 2.0.
This measure would increase the required minimum distribution age for traditional account holders to 75, and there are a host of other changes. This is another matter that you should discuss with your attorney when you schedule an estate plan review.
Take Action Today!
If you are ready to sit down with a Los Angeles estate planning attorney and review your existing plan, we are here to help. And of course, if you need to establish an initial plan, there is no time like the present.
You can schedule a consultation right now if you call us at 310-337-7696, and you can use our contact form if you would rather send us a message.