No Time Like the Present: Estate Planning Strategies for Potential Changes in 2021 and Beyond

Davis Wright Tremaine LLP

The Estate Planning Team at Davis Wright Tremaine LLP issues advisories regularly to communicate important law changes and other matters of interest to our clients, their advisors, and our friends. The 2020 presidential campaign featured many different tax proposals, and by now you have likely seen media coverage reporting on potential federal and state tax law changes. Here we offer a number of proposed changes and pending legislation that could affect your estate planning from the state to federal levels, as well as some strategies to mitigate looming increased tax burdens.

Federal Estate Exemptions

Recall that the $5.4 million to $11.7 million increase in the federal gift, estate, and generation skipping transfer (GST) tax exemptions that commenced with the passing of the Tax Cut and Jobs Act of 2017 is scheduled to sunset at the end of 2025 with a reversion to the pre-Act exemptions of $5 million per individual adjusted for inflation.

While we are not able to anticipate exactly what tax changes the Biden Administration and Congress will propose, it is likely that proposals will include reductions to the transfer tax exemptions before 2026 as a part of a tax package needed to fund the recently passed COVID-19 relief legislation and other federal spending.

Indeed, on March 25, 2021, Senator Bernie Sanders released his own proposed tax bill. It includes a reduction of the federal estate tax exemption from $11.7 million to $3.5 million, a reduction of the federal gift tax exemption from $11.7 million to $1 million, and a significant increase in federal gift and estate tax marginal rates. The bill would be effective January 1, 2022, if passed in 2021.

Given the possibility of reduced transfer tax exemptions, this may be a good time to consider options in terms of the use of some or all of an individual's transfer tax exemptions prior to any such reductions. Some popular strategies include:

  • (A) Outright gifts and gifts in trust: Strategies such as lifetime outright gifts, gifts to dynasty (or GST) trusts, spousal lifetime access trusts (SLATs), and qualified personal residence trusts (QPRTs) are particularly effective ways to use such exemptions.
  • (B) Gifts to take advantage of historically low interest rates: These strategies include utilizing grantor retained annuity trusts (GRATs) and charitable lead trusts (CLTs). There have been recent legislative proposals that would reduce the efficiency of GRATs.
  • (C) Transfers of minority interests in closely held entities: Such transfers typically include consideration of discounts for lack of control and marketability. The availability of such discounts in the future could be limited by potential legislation.

While there is no clarity in the timing of enactment for such potential transfer tax legislation, there has been speculation regarding the possibility of retroactive tax legislation. We are monitoring the possibility of this closely.

While retroactive legislation is possible, it may be difficult to pass given the current makeup and rules of the U.S. Senate. There are some strategies that can be employed to attempt to mitigate the possibility of retroactive federal tax legislation, which could be worthwhile to discuss with your trust and estate attorney.

Washington Estate and Capital Gain Tax

In Washington, a bill was introduced in the state house that would have increased the top state estate tax rates. This bill did not make it out of committee.

The Washington legislature did pass a state capital gain tax bill. The governor has stated that he plans to sign the capital gain tax bill into law. However, if successful, it may face both legal and initiative challenges. The effective date of the pending Washington capital gain tax bill is January 1, 2022.

Oregon Estate and Income Taxes

Oregon continues to impose its own estate tax, but proposals to increase the tax exemption amount have not gained traction. To that end, transfer tax planning for federal transfer tax purposes will continue to result in substantial Oregon estate tax savings.

In addition to transfer tax planning, Oregon income tax considerations continue to drive planning. The City of Portland and Multnomah County have adopted new income taxes, effective January 1, 2021. These include the Supportive Housing Services Tax (top marginal rate of 1 percent) and the Preschool for All Tax (top marginal rate of 3 percent).

The state will further impose an additional income tax, the Paid Family Medical Leave Tax, effective January 1, 2022.

California "Wealth" and Property Taxes

In California, there are renewed attempts to pass a "wealth tax" on qualifying high net worth residents after the failure of 2020 legislation that would have subjected California residents, part-year residents, and any person who spends more than 60 days inside California to a tax equaling 0.4 percent of net worth exceeding $30 million.

On March 15, 2021, new legislation was introduced that would impose a 1 percent annual tax on net household wealth of more than $50 million, and an additional 0.5 percent on household wealth of more than $1 billion.

A two-thirds vote from both houses of the California legislature would be required to put the proposal on the state ballot in 2022, and a simple majority of the state's voters would then need to approve it. Much like the Washington state capital gain tax bill, if passed, the California wealth tax would likely face extensive legal challenges.

So far in 2021, there has been no further movement in California towards a state estate tax. A bill proposed in 2019 (Senate Bill 378) would have levied an estate tax on estates valued at $3.5 million ($7 million for a married couple) or higher. The bill never garnered sufficient support in the legislature to be included on the November 2020 ballot, where it would have required approval by a majority of California voters to become law.

With regard to California property taxes, Proposition 19, approved by voters last November, significantly curtailed the ability of a parent to transfer California real estate to a child while preserving the existing property tax base. The new law applies to any transfers made after February 15, 2021.

Senate Bill 668, introduced on February 19, 2021, seeks to delay the effective date for the provisions of Proposition 19 affecting parent-child transfers until February 16, 2023. Proponents of Senate Bill 668 argue that additional time is necessary for the relevant state agencies to sufficiently elucidate the numerous ambiguities contained in the new law.

With the need for additional official interpretation of the law voiced by many in both the public and private spheres, including the California Assessors Association and the California Board of Equalization, additional guidance on the law's implementation is expected. For more detail on Proposition 19, see Time Is Ticking: Changes to California's Parent-Child Property Tax Reassessment Exclusion Take Effect February 15.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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