Estate Planning: Where Do We Go from Here?

by: Jeff M. Brandon, Senior Wealth Planner

July 8, 2021

Nearly six months into the new administration and with the party in power changing in the Senate and the Executive branch, many are asking what the changes mean for their estate plans.  There are several tax proposals that have been published over the past few months which leaves people wondering if they should take preemptive actions regarding their estate plan.

Where Does Estate Planning Stand Now?

The current estate tax laws, set to expire at the end of 2025, provide the following:

  • An individual can pass (in 2021) $11,700,000 at death, or through gifting during their lifetime, without paying gift or estate taxes.
  • If nothing changes prior to 2026, the lifetime estate and gift tax exemptions will reset to $5,490,000 adjusted for inflation or approximately $6,000,000 per individual.
  • If married, and a spouse dies, the surviving spouse can file with the IRS to have the deceased spouse’s unused estate tax exemptions added to the surviving spouse’s unused lifetime estate and gift tax exclusions (referred to as portability).
  • The lifetime estate and gift tax exemptions are increased each year based on the Consumer Price Index.
  • Any individual can gift $15,000 to as many people as they choose per year during their lifetime without using any of their gift exemption.

Who is Affected?

Starting January 1, 2026, married households with a net worth greater than $12,000,000 or individuals with a net worth greater than $6,000,000 may have estates subject to an estate tax.  If they have previously used some of their lifetime estate and gift tax exemptions, their new estate tax exemption will be reduced by that amount.  The IRS has stated that gifts made before January 1, 2026 at the higher estate tax exemption levels will not be retroactively taxed when the exemption levels sunset at the end of 2025.

What Are Your Options?

If you fall into the category of those affected – or potentially affected, it is important to undergo thoughtful, comprehensive financial and estate planning. Regardless of current or future estate tax laws, this proactive planning allows you to make wise and informed estate planning decisions. We are proponents of annual reviews of financial and estate plans to determine if any actions need to be taken to lessen estate tax impacts under the current tax laws.

Annual gifts to family members are a simple, yet highly effective way to pass assets down when it stays below the IRS’s annual gifting limits.  High-net-worth individuals can directly pay education and medical expenses to providers for someone else without it counting towards the annual gifting limits. When your household is considering gifting, it is important to work with your financial planner to make sure your lifestyle will not be adversely impacted.

Under the current tax laws, highly appreciated assets (real estate, private businesses, marketable securities) receive a stepped-up cost basis upon the death of the owner. That means the heirs won’t have to pay a large capital gains tax when they sell the asset because of the appreciation the original owner saw over years or even decades. The cost basis is reset to the date of death of the owner. For example, if Coca-Cola stock had been originally purchased for $1,000 back in the 1980s and sold today, a capital gain of approximately $250,000 would be taxed to the original owner. If the stock passed to their heir, the original purchase price would be reset to the value of the stock on the date of death, eliminating the large capital gains tax for the heirs.

When a spouse dies, there is no limit to the dollar amount of their assets that can pass to the surviving spouse. As mentioned earlier, if a spouse dies prior to 2026, portability allows for the surviving spouse to preserve any of the deceased spouse’s unused amount of gifting or estate tax exemptions at today’s levels. It is important for the surviving spouse to file with the IRS for portability of the deceased spouse’s lifetime estate and gift tax exemption within nine months of their passing.

Unlike income tax, estate tax can be completely avoided with proper planning and the right set of facts.  A relatively easy way to accomplish this is by leaving to charity any assets over the estate / gift tax exemption remaining upon a taxpayer’s death. If the taxpayer wants to leave additional assets to their heirs, they can do so by purchasing life insurance inside an Irrevocable Life Insurance Trust (ILIT).  Insurance in the trust could also be purchased to replace money going to estate taxes.

Example: Estate Value of $15,000,000 and remaining exemption of $12,000,000 with $3,000,000 paid to charity at the second death keeping the estate below lifetime exemption limits. The ILIT owns a $3,000,000 second-to-die policy (outside the estate) that pays directly to heirs.

Grantor Trusts and Intra-Family Loans can also be used to pass asset appreciation to the next generation.

What Changes Are Being Proposed That Could Affect Estate Planning?

 There are several proposals being floated in Congress and the Executive Branch. Details include:

  • Limiting the Lifetime Gifting exemption to $1,000,000, thereby reducing the amount of money you can pass during your lifetime before paying a gift tax.
  • Loss of Stepped-Up Basis on transfer of assets at death or into an irrevocable trust.
  • Lowering of Estate, Lifetime Gifting, and Generation Skipping Tax exemption to $3.5 million.
  • Higher estate tax rates for amounts above the Estate Tax Exemption.
  • Tighter limitations and higher taxation on Grantor Retained Annuity Trusts.
  • Limitations on the number or amount of annual excluded gifts.

What Actions Should You Take Now?

First and foremost, families should be talking to their financial and tax advisors on a regular basis to make sure they are using the best tax-advantaged strategies available. It is important that your advisors are up to date on your situation and any expected changes that are coming to your family. No one can tell you for sure what tax bills will be passed or the specifics contained within before they are signed into law, so it would be premature to plan for what “could” happen. There are countless stories of households that tried to “get ahead” of a potential tax law change that only ended up limiting their options to enjoy their wealth in the years going forward. The first step is to have a good accounting of your assets and how they work within your financial plan.

If you have questions about your situation, please email Jeff M. Brandon, CFP®, or Michael Mueller, CFP® or call us at 404-874-6244 to discuss your financial plan.