In the United States Congress, there is an arduous journey before a bill becomes law. See https://youtu.be/FFroMQlKiag. But there is a common theme running through some gift and estate tax bills that have been introduced in Congress this year. That is: an appropriate way to raise revenue (for pandemic relief, infrastructure improvements, jobs, whatever the reason) is to collect more taxes when so-called “wealthy” individuals transfer their assets through lifetime transfers and transfers at death.
In this context, “wealthy” generally means an individual who is likely to own assets at death that are worth more than $3.5 million ($7 million for married individuals). If you are in that group, or think you might be in the future, there are things you can do now to eliminate wealth transfer taxes upon your death, or at least minimize them, even if the law changes. The emphasis is on now, because most of the planning strategies that are currently available to eliminate or minimize transfer taxes may no longer be available after the date a bill is enacted into law. (Good news for those who believe none of these proposals will become law – you can stop reading right now.)
There is no one-size-fits-all when it comes to gift and estate tax planning. What is appropriate for your situation depends on your objectives, the circumstances of your beneficiaries, and your particular assortment of assets. With that understanding, here is a list of proposed changes in federal law that may affect your ability to accomplish your objectives:
For the vast majority of Americans (estimates are 99.5% of the people who will die in any given year), a reduction of the estate tax exemption to $3.5 million is of no consequence. But for those who have assets in excess of $3.5 million ($7 million for married individuals), the reduction would reduce their ability to shift wealth out of their estates or into protective structures that may limit the reach of their creditors and their beneficiaries’ creditors, including claims of divorcing spouses. This might mean that there is a great advantage for individuals to use the current $11.7 million exemption now, or as much of it as possible, before a change is enacted. There are several ways to do that while at the same time preserving access to the gifted assets.
Not all of the new tax proposals are designed to raise revenue. Some would protect family farmers by allowing them to lower the value of their farmland by up to $3 million for estate tax purposes. Some also would enhance the tax savings from creating conservation easements on real estate.
The proposed effective date for changes in the gift and estate tax exemptions and tax rates is January 1, 2022. However, the proposed effective date for almost everything else described in this notice is the date of enactment of the new law.
Will any of these proposals be adopted? Will some but not all of them be included in a bill that is designed to gain the necessary votes in the U.S. Senate? No one knows. But certainly the drumbeat of change in federal gift and estate tax laws can be heard.