As America patiently waits for the election results to unfold over the next week, here are five important estate planning “tips” and considerations to review with our estate planning team before year-end:
- Beneficiary designations for retirement accounts (IRAs, 401(k)s, and pension plans): Although the “Secure Act” was enacted on January 1, 2020, it was one of the largest retirement reforms enacted by Congress in recent years. As a result of the Secure Act, there are new regulations that will impact how retirement plan beneficiaries receive a payout (known as Required Minimum Distributions or “RMDs”) of a retirement plan upon the account owner’s death. For instance, in many cases, it may no longer be appropriate to name a revocable living trust as a beneficiary for retirement accounts or specific language may be required in a trust document or Will. For assets such as retirement accounts and life insurance, the beneficiary designation form is a crucial document. If a beneficiary designation is not filled out properly, the wrong or an unintended person could end up with the asset or your estate could end up with an adverse tax result. Beneficiary designations should be reviewed with our office and coordinated with your estate plan.
- Gifting: The annual gift tax exclusion of $15,000 is expected to remain unchanged for 2021. It is a common gifting strategy to make gifts to children and grandchildren, gift trusts, or even 529 college savings plans of $15,000 per donee ($30,000 per donee for a married couple) at year-end. An individual can make gifts in excess of this amount provided that he or she files a Federal Gift Tax Return (IRS Form 709). If you have questions about implementing a year-end gifting strategy to take advantage of the annual gift tax exclusion (or if you are considering making larger gifts or need assistance filing a Gift Tax Return), please contact our office as soon as possible so that we have time to structure your planning before the end of the year.
- Illinois Estate tax Exemption: Although the “Fair Tax Amendment” was rejected by Illinois voters, Illinois continues to have an estate tax exclusion amount of $4,000,000. This means all assets (including the death benefit value of life insurance, retirement and investment accounts, real estate, significant personal property, business interest) owned by an Illinois resident in excess of $4,000,000 will be subject to Illinois estate tax at the individual’s death. There are common estate planning strategies to reduce or eliminate the Illinois estate tax – even for non-residents of Illinois who still own real estate in Illinois. We recommend both Illinois residents and non-residents to contact our office to review strategies we can use to eliminate Illinois estate tax concerns.
- Federal Estate Tax Exemption: The federal estate tax exemption (“basic exclusion amount”) is currently $11,580,000 and is scheduled to adjust for inflation to $11,700,000 in 2021. However, depending on the results of the presidential election and Congress, this number is subject to change. There have been discussions among the Democratic Party of a possible shift back to a lower basic exclusion amount of $5,000,000 or even $3,500,000. It is very important for families with assets in excess of this exclusion amount who are interested in adding certainty to their estate plan and in exploring tax planning strategies to take advantage of the current basic exclusion amount to contact our office before year-end.
- Inherited Assets, Income Tax, and Capital Gains Rate: If Vice President Biden is elected as President, Biden’s tax plan could result in families paying higher income taxes upon death by changing the IRS’s step-up in basis rules.
What is a “step-up” in basis and why should I care? A step-up in basis automatically adjusts the tax basis for inherited assets (including real estate, publicly-traded stock, closely-held and family-owned businesses) to their fair market value at the time of death of the person holding the assets. This typically means a recipient of the inherited property will not pay income taxes on the property if the recipient sells the property shortly after a decedent’s death. This step-up in basis rule is a tax benefit for everyone, irrespective of the size of the estate or the income of the recipient, and is one of the few benefits the IRS currently gives to heirs and estate beneficiaries. Biden’s tax plan calls for eliminating this step-up in basis and instead carrying over an asset’s tax basis from the decedent to the person inheriting the asset. In addition, Biden has proposed a tax on asset’s unrealized appreciation at the time of transfer, regardless of whether the inherited asset is sold or not. Furthermore, Biden’s proposal would increase the capital gains tax rate to the same tax rate as ordinary income for those with taxable income in excess of $1 million. For families holding appreciating assets such as real estate or family-owned businesses, now may be the opportune time to create a succession plan to consider passing appreciating assets to the next generation.
GSRNH is here to offer peace of mind to you and your family. Give us a call so we can make sure your planning will work as intended to achieve your goals and to explore new estate planning and wealth transfer strategies. We are here to serve as a guide to you and to help craft a plan that your family will thank you for. Call us today at 630-655-6000 to schedule a consultation.
Written by: Michelle V. Hanlon and Daniel J. McCarthy, III