Estate planning attorneys emphasize the fact that estate plan revisions are probably going to be necessary over the years. Evolving circumstances in your own life can make updates necessary, and there can be changes in laws that impact aspects of your estate plan.
Legislative moves often coincide with a majority shift in Washington, and we are in one of those periods right now. Predictably, there are two relevant legislative measures making their way through Congress at the present time, and we will look at them here.
For the 99.5 Percent Act
During the presidential primary season, Senator Bernie Sanders of Vermont repeatedly expressed his position on the state of affairs with regard to wealth distribution. He targeted the wealthiest one percent of Americans, and he has now introduced the “For the 99.5 Percent Act.”
This piece of legislation would significantly expand the federal estate tax.
The estate tax credit or exclusion is a dollar amount that can be transferred before the tax would be applied on the remainder. In 2017, it was $5.49 million, and in December of that year, the Tax Cuts and Jobs Act was enacted.
This measure raised the estate tax exclusion to $11.18 million in 2018, and the 40 percent top rate was retained. There have been inflation adjustments since that time, and the exclusion stands at $11.7 million in 2021.
The For the 99.5 Percent Act would decrease the exclusion to just $3.5 million. The max rate would go up to 45 percent for the first $10 million, and it would start graduating as the numbers get larger.
Under this measure, the ceiling would be 65 percent for estates valued at more than $1 billion.
In addition to the estate tax, we also have a gift tax in the United States. It is in place to stop people from giving lifetime gifts to completely avoid the estate tax.
The gift tax and the estate tax have been unified since the 1970s, so the exclusion is a unified exclusion. It applies to gifts that you give while you are living and the estate that will be transferred after your death.
This bill would change that arrangement. It includes a provision that would limit lifetime gift giving to $1 million.
There is an annual gift tax exclusion that sits apart from the multimillion dollar unified exclusion. It allows you to give as much as $15,000 a year to any number of gift recipients, and you can use this exclusion to fund certain types of irrevocable trusts.
Under the For the 99.5 Percent Act, total annual gifts to irrevocable trusts would be limited to $30,000 per year.
Sunset of Tax Cuts and Jobs Act
Even if this measure fails to become law, there is going to be a reduction in the estate tax exclusion in the near future. The provision in the Tax Cuts and Jobs Act that increased the exclusion is going to sunset at the end of 2025.
In 2026, the exclusion will go back down to $5.49 million. When you digest the implications, you can see that you should consider lifetime gift giving during the next few years when the exclusion is still at a record high.
Sensible Taxation and Equity Promotion (STEP) Act
The other measure targets the stepped-up basis. To explain the step-up in basis through the use of an example, let’s say that your uncle leaves you stock that is worth $100,000 when you acquire it.
He bought the stock for $10,000 many years before he passed away. There was a $90,000 capital gain during his lifetime, and he would have been required to pay the capital gains tax if he would have sold the assets while he was still alive.
For your purposes, the assets would get a stepped-up basis. The gains that accumulated during your uncle’s life would essentially be forgotten, and the capital gains meter would be reset.
This legislation would allow for the first $1 million to get a stepped-up basis, and the rest would be subject to the capital gains tax.
A rate increase is also possible. Right now, the maximum long-term capital gains rate is 20 percent, and President Biden would like to see an increase to 39.6 percent.
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