Potential Tax Changes That Could Impact Your Estate Planning

Have you considered potential tax changes that may impact your estate planning? Every new administration comes with potential tax changes that could impact your estate planning. With a new president having taken office, it can be important to look to the tax task force proposals to see what changes might be underway.

It is prudent to keep an eye out for changes relating to estate and gift taxes. Prior to the election, the Biden tax task force proposed that estate taxes be raised back to a more historical norm. Prior to 2017, the gift and estate tax exemption stood at roughly $5.5 million per individual and $11 million for a married couple. Under the Tax Cuts and Jobs Act, in 2020 the gift and estate tax exemption almost doubled to $11.58 million per individual, and $23+ million for a married couple. This means high net worth individuals and couples can transfer that amount of wealth upon death without an assessment of federal estate and gift tax rate that can reach up to 40%. For most families, returning to the lower exemption ceiling may not matter much, but there are other changes proposed as well.

One proposed change is to the step-up basis provision in the tax code that permits an individual or couple to buy and hold an asset, then pass it on to their heirs at death, with the basis for potential capital gains for the heirs stepped-up to the current market value. The step-up basis currently means there is no tax on the appreciation in value that occurs over the years that the original owners hold an asset. The proposal would eliminate this provision so that, if an heir inherits an asset with tremendous appreciation in value, the long-term capital gains tax rate applied on its sale will be applied to the entire appreciation from the purchase date by the original owner, not from the value on the date the heir inherited.

In anticipation of an eliminated step-up basis or a higher long-term capital gains tax rate, your family might choose to sell investments that have appreciated significantly now in order to take advantage of the current rates. There may, however, be other tax planning strategies that work for your family that allow you to avoid selling an asset prematurely. As with any major decision, there can be pros and cons to the varying choices available, and it can be important to discuss the ramifications with your advisors to ensure a thorough understanding of potential consequences. 

You may be wondering how you could or should address these potential changes in your estate plan. The best course of action for individuals and families may be to consult with your estate planning attorney to discuss the many potential scenarios that could result from the implementation of any proposed tax changes. Please reach out to our office to schedule a time to meet.