What’s Happening to the Estate Tax?

Proposals now being considered by President Biden may expand the number of Americans who will need to pay the federal estate tax in one of two ways: raising rates and lowering qualifying thresholds on estates and increasing the liability for inheriting and selling assets. It is likely that these changes will raise revenues from the truly wealthy, while also imposing estate taxes on Americans with more modest assets, according to a recent article “It May Be Time to Start Worrying About the Estate Tax” from The New York Times.

Inheritance taxes are paid by the estate of a person who died. Some states have estate taxes of their own, with lower asset thresholds. As of this writing, a married couple would need to have assets of more than $23.4 million before they had to plan for federal estate taxes. This historically high exemption may be ending sooner than originally anticipated.

One of the changes being considered is a common tax shelter. Known as the “step-up in basis at death,” this values the assets in an estate at the date of death and disregards any capital gains in a deceased person’s portfolio. Eliminating the step-up in basis would require inheritors to pay capital gains whenever they sold assets, including everything from the family home to stock portfolios.

If you’re lucky enough to inherit wealth, this little item has been an accounting gift for many years. A person who inherits stock doesn’t have to think twice about what their parents or grandparents paid decades ago. All of the capital gains in those shares or any other inherited investment are effectively erased, when the owner dies. There are no capital gains to calculate or taxes to pay.

However, those capital gains taxes are lost revenue to the federal government. Eliminating the step-up rules could potentially generate billions in taxes from the very wealthy but is likely to create financial pain for people who have lower levels of wealth. A family that inherited a home, for instance, would have a much bigger tax burden, even if the home was not a multi-million-dollar property but simply one that gained in value over time.

Reducing the estate tax exemption could lead to wealthy people having to revise their estate plans sooner rather than later. Twenty years ago, the exemption was $675,000 per person and the tax rate was 55%. Over the next two decades, the exemption grew and the rates fell. The exemption is now $11.7 million per person and the tax rate above that amount is 40%.

Lowering the exemption, possibly back to the 2009 level of $3.5MM, would dramatically increase tax revenue.

What is likely to occur and when, remains unknown, but what is certain is that there will be changes to the federal estate tax. Stay up to date on proposed changes and be prepared to update your estate plan accordingly.

Reference: The New York Times (March 12, 2021) “It May Be Time to Start Worrying About the Estate Tax”

 

Trusts can Work for ‘Regular’ People

A trust fund is an estate planning tool that can be used by anyone who wishes to pass their property to individuals, family members or nonprofits. They are used by wealthy people because they solve a number of wealth transfer problems and are equally applicable to people who aren’t mega-rich, explains this recent article from Forbes titled “Trust Funds: They’re Not Just For The Wealthy.”

A trust is a legal entity in the same way that a corporation is a legal entity. A trust is used in estate planning to own assets, as instructed by the terms of the trust. Terms commonly used in discussing trusts include:

  • Grantor—the person who creates the trust and places assets into the trust.
  • Beneficiary—the person or organization who will receive the assets, as directed by the trust documents.
  • Trustee—the person who ensures that the assets in the trust are properly managed and distributed to beneficiaries.

Trusts may contain a variety of property, from real estate to personal property, stocks, bonds and even entire businesses.

Certain assets should not be placed in a trust, and an estate planning attorney will know how and why to make these decisions. Retirement accounts and other accounts with named beneficiaries don’t need to be placed inside a trust, since the asset will go to the named beneficiaries upon death. They do not pass through probate, which is the process of the court validating the will and how assets are passed as directed by the will. However, there may be reasons to designate such accounts to pass to the trust and your attorney will advise you accordingly.

Assets are transferred into trusts in two main ways: the grantor transfers assets into the trust while living, often by retitling the asset, or by using their estate plan to stipulate that a trust will be created and retain certain assets upon their death.

Trusts are used extensively because they work. Some benefits of using a trust as part of an estate plan include:

Avoiding probate. Assets placed in a trust pass to beneficiaries outside of the probate process.

Protecting beneficiaries from themselves. Young adults may be legally able to inherit but that doesn’t mean they are capable of handling large amounts of money or property. Trusts can be structured to pass along assets at certain ages or when they reach particular milestones in life.

Protecting assets. Trusts can be created to protect inheritances for beneficiaries from creditors and divorces. A trust can be created to ensure a former spouse has no legal claim to the assets in the trust.

Tax liabilities. Transferring assets into an irrevocable trust means they are owned and controlled by the trust. For example, with a non-grantor irrevocable trust, the former owner of the assets does not pay taxes on assets in the trust during his or her life, and they are not part of the taxable estate upon death.

Caring for a Special Needs beneficiary. Disabled individuals who receive government benefits may lose those benefits, if they inherit directly. If you want to provide income to someone with special needs when you have passed, a Special Needs Trust (sometimes known as a Supplemental Needs trust) can be created. An experienced estate planning attorney will know how to do this properly.

Reference: Forbes (March 15, 2021) “Trust Funds: They’re Not Just For The Wealthy”

 

Remind Me Why I Need a Will

There are a number of reasons to draft a will as soon as possible. If you die without a will (intestate), you leave decisions up to your state of residence according to its probate and intestacy laws. Without a will, you have no say as to who receives your assets or properties. Not having a will could also make it difficult for your family.

Legal Reader’s recent article entitled “Top 7 Reasons to Fill Out a Will” reminds us that, before it is too late, consider these reasons why a will is essential.

Avoid Family Disputes. This process occasionally will lead to disagreements among family members, if there’s no will or your wishes aren’t clear. A contested will can be damaging to relationships within your family and can be costly.

Avoid Costly and Lengthy Probate. A will expedites the probate process and tells the court the way in which you want your estate to be divided. Without a will, the court will decide how your estate will be divided, which can lead to unnecessary delays.

Deciding What Happens to Your Assets. A will is the only way you can state exactly to whom you want your assets to be given. Without a will, the court will decide.

Designating a Guardian for Your Children. Without a will, the court will determine who will take care of your minor children.

Eliminate Stress for Your Family. Most estates must go to probate court to start the process. However, if you have no will, the process can be complicated. The court must name personal representatives to administer your estate.

Protect Your Business. A will allows you to pass your business to your co-owners or heirs.

Provide A Home For Your Pets. If you have a will, you can make certain that someone will care for your pets if you die. The law considers pets as properties, so you are prohibited from leaving assets to your pets in your will. However, you can name beneficiaries for your pets, leaving them to a trusted person, and you can name people to serve as guardians of your pets and leave them funds to meet their needs.

Drafting a will with the help of an experienced estate planning attorney can give you and your family peace of mind and convenience in the future.

Reference: Legal Reader (Jan. 28, 2021) “Top 7 Reasons to Fill Out a Will”