Now What? Post-Election Estate Tax Planning Recommendations

Now that Biden has been sworn in as the President of the United States AND the House and Senate are controlled by the Democrats, creating a unified government, many people are asking, “Now What?” when it comes to various estate tax planning strategies.

Current Environment

Under the Tax Jobs and Cuts Act of 2017 (“TJCA”), the base estate tax exemption was temporarily increased from $5.0 million to $10 million, and indexed for inflation from 2011. For 2021, the estate tax exemption under current law (the TCJA) is $11.7 million per person. The annual gift tax exclusion remains at $15,000 per donor, per beneficiary.

Expected Estate Tax Changes Under Unified Democratic Government

It is widely expected that President Biden will seek to reduce the estate tax exemption to “historical” norms, meaning reducing the estate tax exemption from $11.7 million and tied to inflation, to a fixed $3.5 million. It is also expected that the estate tax rate will increase from 40% to 45%. Additionally, the proposed tax law changes include decoupling the gift tax and estate tax exemptions so that the annual lifetime exemption would be reduced to $1.0 million, although the gift tax rate would increase to 45%.

Planning Recommendations Depending on Net Worth Range

• Recommendations for All Clients – It is important that all clients undertake a review of their estate plan, whether they have a formal plan or no plan at all. Identifying desired beneficiaries and how those beneficiaries will receive inheritances, as well as identifying desired decision makers remain critical. In addition to the changing political environment, uncertainty with the economy and the pandemic are causing many clients to think about estate planning and related issues, such as health care directives.

• Combined net worth less than $7.0 million – Focus on the estate plan (beneficiaries), family dynamics, and eliminating probate while maintaining flexibility.

• Combined net worth $7.0 million to $23.4 million – Same considerations as above, while also using low interest rate estate planning techniques to transfer wealth outside the estate tax system.

• Combined net worth greater than $23.4 million – Complete the basics above, but consider aggressive use of irrevocable grantor trusts to shift wealth out of the estate tax system while minimizing transfer taxes and maintaining flexibility to address future changes.

One of the changes that is difficult to predict is whether any tax law changes will be retroactive to January 1, 2021, or whether they will be effective upon enactment. Therefore, it is recommended that clients who are
interested in shifting wealth take action now to implement transfers before any change of law is announced and to use techniques which provide flexibility to adjust to retroactive tax law changes.

Did You Know?

We will prepare powers of attorney for financial and health care decisions for a client’s adult children who are between the ages of 18-26 and living at home at no charge to the client. If a client has adult children and it is been a while since they have updated their estate plan, this is a good reason for a client to review and update their plan and provide incapacity planning for their children at the same time.

If you have questions about this Alert, to discuss any of these techniques in detail, or how these recommendations apply to a particular circumstance, please call Dan Peare, Hugh Gill, or Ryan Farley at 316.631.3131.

To view this alert as a PDF, click here.