Current Tax Proposals and the Potential Impact on Your Estate Plan

Fri Jul 30, 2021 | Asset Protection |

The election of President Biden and other Congressional democrats has signaled significant changes in store for many Americans. In addition to political and cultural changes, proposed tax plans could profoundly impact current and future estate plans for many Americans. While we don’t yet know what changes will be passed and when or how they will be implemented, it’s worth considering what changes you may need to make so that you are prepared when the time comes. Even though there is still considerable uncertainty, a Boca Raton asset protection attorney can review your current estate plan and help you prepare for the future. 

Three Current Tax Proposals

There are currently three primary proposals being considered in Washington that could significantly impact estate, gift, and income tax rates. First, Senator Chris Van Hollen has put forward the Sensible Taxation and Equity Promotion or “STEP” Act. Second, Senator Bernie Sanders has proposed what is referred to as the For the 99.5% Act. Finally, President Biden has his own proposal that shares some similarities with both. Key elements of each proposal will be discussed below. If you have any questions concerning how these proposals may impact your estate plan, a Boca Raton asset protection attorney can provide some guidance. 

For the 99.5% Act

The Sanders proposal focuses on changing the tax rules related to gift and estate taxes, as well as those related to generation skipping transfers (GSTs): 

  • Exemptions for lifetime estate and generation skipping transfers will be reduced from the current limit of $11.7 million to $3.5 million; 
  • The lifetime gift tax exemption limit of $11.7 million will be reduced to $1 million;
  • The federal estate and gift tax rates, currently capped at 40%, could be increased to as high as 65%; 
  • The annual gift tax exemption of $15,000 per person could be limited to $30,000 when making gifts to a trust;
  • Dynastic or GST-exempt trusts would remain exempt for only 50 years;
  • Grantor retained annuity trusts (GRATs) would be significantly limited to the point of being effectively eliminated. 

Sensible Taxation and Equity Promotion or “STEP” Act

Senator Van Hollen’s proposal focuses on transactions that were previously not subject to income tax and assigning them to gain recognition events. 

  • Capital gains taxes will be assessed on most gifts made during the donor’s life or upon death, effectively treating the gift as a sale of property;
  • Transfers to a grantor trust could be subject to capital gains tax if the property was not included in the grantor’s taxable estate at death; 
  • Non-grantor trusts would be subject to gain recognition events every 21 years, meaning that the trust would be taxed as if it had sold all of its assets;
  • The rules regarding the step up in the decedent’s tax basis at death would be effectively eliminated. 

We should also note that, if passed, the STEP Act would be retroactive to January 1, 2021, meaning that it could affect existing estates and transfers that previously occurred. This possibility has left many people worried that any changes made to their estate plan in anticipation of this proposal could result in significant tax consequences. 

President Biden’s Proposal

The President’s proposal is perhaps more focused on income tax reforms than changes to the existing estate tax structure. At the same time, its provisions are somewhat unclear and open to interpretation.  

  • Gifts and transfers at death would be subject to the capital gains tax;
  • Capital gains would be taxed at the ordinary income tax rate if the taxpayer’s adjusted gross income exceeds $1 million;
  • Transfers in and out of LLCs, partnerships, and trusts would trigger capital gains recognition;
  • Trusts and other non-corporate entities would be subject to capital gain recognition every 90 years; 
  • Termination of a trust or transfer to another trust would be considered a taxable event subject to the capital gains tax; 
  • The step-up in tax basis at death will be eliminated. 

President Biden’s proposal could result in considerable tax consequences for people who planned their estate specifically to minimize their tax liability. If you are concerned about how any of these proposals may impact your beneficiaries’ inheritance, you should contact a Boca Raton asset protection attorney as soon as possible.  

What Should You Do?

The challenge, of course, is that we don’t know what will happen – no one can predict the future. That said, we think it is safe to assume that there is a good chance that there will be some new laws that could significantly impact your estate plan in the near future. Because some of these proposals under consideration would be retroactive, it’s challenging to recommend that you take any specific actions for fear that it will trigger an even larger penalty. That said, there are some steps you can take to prepare for whatever changes may come. 

  1. Gather all of your estate planning documents. You want to make sure that you, your professional advisers, and any other necessary parties have current, fully executed documents. If there are changes to the laws, you do not want to waste time trying to find the documents your lawyer will need.
  2. Candidly evaluate your current estate plan. These proposals intend to create a more equitable tax system by eliminating real or perceived “loopholes” that people would use to avoid taxation. You should review your current estate planning structure to ensure that any transfers are well-documented and squarely within the law. You may need to consider divesting control of certain assets or separate yourself from certain trusts or other entities. 
  3. Meet with a Boca Raton asset protection attorney to discuss and evaluate your current estate plan as soon as possible. If any of these proposals are passed, all estate planning lawyers will be incredibly busy. By contacting us now, we will already be familiar with your estate plan and be able to quickly recommend the changes you need to make. 

Contact a Boca Raton Asset Protection Attorney at Ellis Law Group

Even though the situation remains uncertain, the lawyers at Ellis Law Group are monitoring these proposals as they move forward. Our goal is to provide our clients with timely legal advice and carefully tailored estate plans designed to protect their wealth. To discuss your needs with an experienced Boca Raton asset protection attorney, contact us today at 561-910-7500.