2021 ushered in a new administration in Washington, D.C. with a Democrat controlled Congress. This may present some challenges and opportunities in estate planning.
Restrictions on gifting.
Presently, an individual can transfer $11,700,000 through their estate without the estate being required to pay estate or gift taxes. For married couples that amount doubles using the stacking option for the tax exemption in the current law. In the past, legislative initiatives have targeted this exemption for substantial reduction. Drafts of proposed legislation seek to change the gifting exemption for estates reducing the exemption to $675,000 or $1,000,000. This is a dramatic shift and would alter the need for estate planning to address this new tax for the vast majority of Americans.
Similarly, proposed legislation in the past, championed by Democrats critical of tax-free wealth transfer from one generation to the next, outlines the elimination of favorable treatment of capital assets, including negating the stepped-up basis to the date of death of both real estate and financial assets. If this legislation is re-introduced, it would require an examination of the current status of capital assets to determine if transferring them to Trusts or into newly established LLCs is an appropriate planning tool.
Finally, some lobbyists have proposed the reduction or elimination of the lifetime gifting tax exemption and modification of the annual gift tax exclusion of $15,000/person/gift during a person’s lifetime. This would alter wealth transfer strategies and require a new approach to minimize taxes or other adverse consequences.
These policies are put forward in an effort ostensibly to increase the tax revenue of the federal government. They are cloaked in the ideology of wealth redistribution and tax equity. However, since the income which acquired these assets was taxed when it was earned, the possible changes encouraged by a new administration would serve more to punish those who might inherit from their parents or relatives. This would not be about fairness but envy.
Either way, careful estate planning needs to be pursued to avoid any unintended consequences.