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Biden Blue Sweep – Potential Changes to the Estate Tax and Planning Steps for 2021

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With the Senate going to the Democrats in January they now have control of all three pillars in DC to make sweeping tax reforms. This has led many to believe it is more urgent now to get the ball rolling this year on your family estate plan as there may be drastic estate and gift transfer tax changes during Biden’s Presidency.

Estate Planning – It’s Important to have a plan at any age

A common misconception is that estate planning is only for those of retirement age.  The unprecedented Covid-19 pandemic has highlighted the importance of not only having key estate planning documents in place (i.e. a will, healthcare proxies, durable powers of attorney (POAs), life insurance coverage, designated guardians, etc.) but also a “family plan of action” in the event of the unexpected.  Estate planning and key documents should be reviewed at-least every five years, during a significant life change (retirement, company IPO, business sale, marriage, birth of a child, divorce), or based on significant changes in the estate law.  Estate planning should also encompass long-term family goals and values.

Potential Federal Estate Tax Reform

Biden’s campaign tax proposal suggests a reversion in the life-time gift and estate tax exemption amount to the 2009 Obama Administration levels of $3.5M with a top rate of 45%.

While Biden’s plan has suggested no basis step-up for inherited property there is a proposal suggesting a $100,000 exclusion per person (indexed annually for inflation), there would be an exemption for the transfer of a principal residence or a small family business or farm.

Most tax analysts don’t expect Biden’s tax reform to be retroactive but it is possible and something we continue to monitor at BP.

Potential Higher State Wealth Taxes

There are 17 states (Washington is one) with inheritance or estate tax in the United States and state exemptions amounts are significantly lower than the federal amount. In the context of estate planning choosing your state domicile will be crucial for long-term planning. States that do not have an estate or inheritance tax, coupled with low (or no) income, sales, or property taxes which should also be considered.

Washington’s current estate tax exemption is $2.193M for 2021, with a top rate of 20%. Washington does not have a state gift tax, which can be a great estate planning tool for lifetime transfers, for Washington residents.

With coronavirus hits to state budgets, states are trying to find more new ways to make up for other shortfalls. Washington’s proposed House Bill 1465 suggests estate tax rates start at 14% (up from 10%) and go up to 40% (from 20%) on mega-estates over one billion, along with another new bill for a 1% wealth tax on billionaires. We continue to monitor these potential state changes.

Below are some BP insights and planning tips on how families can navigate potential higher federal and state transfer taxes:

  • 2025 Sunset – Even absent changes to the lifetime estate and gift tax exemption amount, the current $11.7M exemption amount will sunset at the end of 2025 to $5M, as adjusted for inflation. The reversion to the 2017 level of $5M (as adjusted for inflation) is a compelling reason for those who are already considering or making larger lifetime gifts to put the pedal to the metal.  The Treasury also issued guidance in early 2020, confirming no “clawback” for lifetime gifts made under the now higher exemption amount.
  • Annual exclusion gifts – For 2021, there remains the $15,000 per person ($30,000 for a married couple) annual exclusion gifts which don’t use up any lifetime gift or estate tax exemption amount. 529 plans also allow for larger gifts under the five-year averaging election.  An unlimited amount can be gifted for direct payments on qualified medical expenses or tuition expenses on behalf of a person.
  • Business Succession Planning – Having a document in place, such as a buy-sell agreement or trusts that retain ownership of a family business in the event of the unexpected passing of an owner, can also help keep a business in the family and provide liquidity of the estate.
  • Discounted gifts – Making “efficient” gifts means gifts that use up the least amount of exclusion as possible. Gifts of family limited partnership interests (or LLC units) have the benefit of discounts for lack of marketability and control (often ranging from 30-40%) and help to retain ownership in the family.
  • Leveraged vehicles – Trusts (both grantor and non-grantor types), charitable trusts, foundations, Spousal Lifetime Access Trusts (SLATs), and Qualified Personal Residency Trusts (QPRTs) freeze estate values and pass assets to the next generation.
  • SLATs – Particularly hot right now, since they allow one spouse to use up their remaining lifetime gift and estate tax exemption amount (currently $11.7M), for gifts in trust, that would benefit their spouse for life. Gifts to an irrevocable SLAT, including any growth of assets following the gift, are outside the donor’s estate and not subject to estate tax. The beneficiary spouse can take distributions of income and/or principal from the SLAT to benefit over his or her lifetime.  SLATs are typically set up as “grantor type trusts” meaning the donor spouse continues to pay income tax on assets in trust, leaving even more room for trust appreciation to the beneficiary spouse.

Now is the time to review your estate documents so you have a plan in place in case of the unexpected. Our Berntson Porter Estate Planning Council (BP EPC) has a network of resources and estate specific expertise, including estate planning attorneys that we can refer you to, if you want to start the process. Give us a call as we are happy to discuss estate planning for your family!