Where the U.S. Estate Tax may be Headed in the Next Four Years (and What You Can Do Now)

After an election process that has been unprecedented, Joseph Biden is the next president of the United States, and the Democratic Party will have control of both the U.S. Senate and the House of Representatives. Although specifics are not yet known with any level of certainty, during the presidential campaign the Democratic Party endorsed the possibility of a reduction of the current estate tax exemption and elimination of the step-up in basis at death. Changes to the estate tax are not typically retroactive, but those looking for certainty and hoping to take full advantage of the estate tax exemption now can take certain steps and implement gifting strategies to lock in the current estate tax exemption. There may be a small window of opportunity to make these changes once any new tax laws are adopted.

The Federal estate tax (commonly known as the “death tax”) includes an exemption or credit of $11,700,000 for an individual dying in 2021; this is the highest threshold the estate tax exemption has ever been. This means an individual’s estate will not be subject to the Federal estate tax (a tax rate of 40%) unless the assets of an individual’s estate exceed the estate tax exemption threshold. However, the estate tax exemption amount is subject to change and may be one of the items on Congress’s agenda. There have been predictions that the estate tax exemption may be decreased to as low as $3,500,000.

If you have been considering making gifts of a business interest, real estate, or other assets but have not decided when to make such gifts, now may be the time. For an individual or couple with a higher net worth who are concerned about the possibility of a decreasing estate tax exemption, consider the gifting strategies outlined below before the opportunity is lost.

If you are considering a proactive approach to your planning, consider the following to take advantage of your available estate tax exemption:

  • Gifting discounted interests in business assets, real estate, or any other assets expected to appreciate in value during your lifetime. Gifts can be made outright to children or other family members, or to an irrevocable gift trust or dynasty trust. Trusts for children can be designed to last for many generations and can shelter any appreciation on the assets in the trust from future estate or gift taxes all while protecting the assets in the trust from creditors and marital claims.
  • Married couples can lock in the current estate tax exemption by establishing trusts for each other known as Spousal Lifetime Access Trusts (“SLATs”). A spouse can gift up to $11,700,000 in value to a SLAT for the benefit of each other without incurring a gift tax. These trusts can therefore take advantage of the full estate tax exemption before it is reduced while still providing access to the assets through your spouse during your lifetime. The assets in the SLAT would not be subject to federal estate tax upon either spouse’s death.
  • Grantor retained annuity trusts (“GRATs”) work well during times of low-interest rates with assets that are likely to significantly appreciate in value. This type of trust is typically set up for a number of years and at the end of the term of the trust, the assets are distributed to the remainder beneficiaries (such as your children and grandchildren). Even if the assets in the trust have appreciated in value, the assets and the appreciation are not subject to estate tax at your death.
  • Irrevocable life insurance trusts continue to remain attractive as life insurance proceeds are not currently subject to income tax. Life insurance trusts can remove the value of a significant life insurance policy from your gross estate so that the death benefit is not subject to estate taxes.

If you haven’t had a chance to incorporate the above strategies in your personal planning, contact any member of our GSRNH estate planning team as soon as possible so we can discuss the best estate planning and gifting strategies for you. Please call us at 630-655-6000 or email us at INFO@GSRNH.COM.

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