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Current Estate Planning Environment – Planning for the Unknown

President Biden has now been in office for six months, and there is still great uncertainty whether new tax laws will be enacted this year. This article discusses some of the proposed tax changes and potential planning opportunities for individuals with various levels of wealth.

As a reminder, the biggest recent change in estate planning took place when the Tax Cuts and Jobs Act of 2017 increased the federal gift, estate, and generation skipping transfer (GST) tax exemptions from $5.49 million in 2017 to $11.18 million in 2018 (currently $11.7 million in 2021). Under current law, these exemptions are scheduled to revert in 2026 to the pre-2018 exemptions of $5 million per individual adjusted for inflation. Washington continues to impose its own state level estate tax, which under current law kicks in above $2,193,000.

It is important to review current estate plans to determine if updates are necessary as families mature and tax laws change. However, taxes are only one of many considerations of an estate plan. Additional items to think about are: titling of bank accounts; beneficiary designations; insurance contracts; wills; powers of attorney; health care directives; and trusts.

Once assets are above $2.193 million, individuals need to review their estate plan to ensure it utilizes flexible tax planning, specifically upon the first spouse’s passing. It is important to note that Washington does not impose a gift tax on transfers made during life. Thus, under current law, a Washington resident can make lifetime gifts, lowering the value of their estate, and if federal gift exemption is used to make the gifts, the gifts would not be taxed.

Once assets are above $11.7 million, whether new tax law changes are enacted is paramount. On April 28, 2021, President Biden announced the American Families Plan, which includes proposals to strengthen taxation of high-income taxpayers. The proposals seek to increase the top marginal income tax rate for high earners, tax capital income for high-income earners at ordinary rates, and treat transfers of appreciated property by gift or on death as taxable realization events.

First, the top individual income tax rate would increase from 37% to 39.6%. Second, taxpayers with incomes over $1 million would pay a tax on long-term capital gains and qualified dividends at the highest ordinary income tax rate, with 43.4% being the highest rate (including the 3.8% net investment income tax, and assuming the top ordinary individual income tax rate is increased). Third, under the proposal the donor or deceased owner of an appreciated asset would realize a capital gain at the time of a transfer or gift.

This “realization” tax would effectively end the practice of “stepping-up” the basis at death for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions for the primary residence). Additionally, transfers of property into, and distributions in kind from, a trust, partnership, or other non-corporate entity would be recognition events subject to the above tax once the threshold amounts are met.

Note – this article does not address all of the tax law proposals in the American Families Plan. These changes would need to be enacted by Congress in order to become law. There is uncertainty as to the effective date of these proposed tax changes and the potential for retroactive legislation. This is something to monitor.

In conclusion, no matter the level of wealth, it is important to have an estate plan in place that accomplishes your goals and objectives. The current tax environment is dynamic, thus an effective plan must adapt to the evolving situation to ensure your assets pass to your intended beneficiaries in the most tax efficient manner. If you would like to discuss any of the planning opportunities or issues covered in this article, or your estate plan in general, the estate planning team at Jeffers, Danielson, Sonn & Aylward, P.S. is here to help.


By Scott B. Hershey – Jeffers, Danielson, Sonn & Aylward, P.S.

This article published in the Wenatchee Valley Business World