The pandemic has forced many people to put some non-essential responsibilities on the back burner. This holding pattern may apply to your periodic estate plan review, but it is now time for action.
If you know that a revision is necessary because of a life change, we are here to help, and general reviews are recommended. This being stated, at this particular juncture, there are a couple of pieces of legislation pending that would have a direct impact on many estate plans.
Adjustments will be necessary for a lot of folks, and you should be prepared to take action sooner rather than later.
For the 99.5 Percent Act
We have a federal estate tax in the United States, but most Americans do not have to worry about it because you can transfer a rather large amount tax-free. This figure is the estate tax credit or exclusion, and right now, it is at a record high.
The Tax Cuts and Jobs Act that was enacted at the end of 2017 increased the exclusion from $5.49 million to $11.18 million. There have been adjustments to account for inflation since then, and in 2021 the exclusion is $11.7 million. The maximum rate of the tax is 40 percent.
Senator Bernie Sanders is championing the For the 99.5 Percent Act right now. This measure would reduce the estate tax exclusion to $3.5 million, and it would increase the rate to 45 percent for estates valued at $10 million or less. The rate would rise for larger estates with a 65 percent ceiling for estates that are worth more than $1 billion.
There is a gift tax in place to stop people from giving gifts to avoid the estate tax. The two taxes were unified during the 1970s, so the $11.7 million exclusion includes lifetime gift giving and the estate that will be transferred after your passing.
Sanders wants to change this arrangement. This measure contains a provision that would limit lifetime tax-free gift giving to just $1 million.
Of course, a bill and a law are two different things, but there is another dimension to this equation. The provision in the Tax Cuts and Jobs Act that established the record high exclusion is going to sunset on January 1, 2026.
At that time, the exclusion will be radically reduced. It will revert to the 2017 level of $5.49 million. To be clear, this will happen even if no new legislation is passed in the meantime.
When you weigh the implications, you can see why you should review your existing plan with an attorney from our firm as soon as you can.
Sensible Taxation and Equity Promotion Act of 2021
The other piece of legislation that is making its way through the process is the Sensible Taxation and Equity Promotion Act (STEP) of 2021. This measure targets the capital gains tax.
As it stands today, if you inherit appreciated assets, they get a stepped-up basis. This means that you would not pay capital gains taxes on gains that accumulated during the life of the person that left you the inheritance.
People that are extremely wealthy can use the step-up in basis to great advantage as they pass along generational wealth in a tax-free manner. The STEP Act would eliminate the step-up in basis, but there would be a $1 million exemption.
There is another major component in this bill. At the present time, the top long-term capital gains rate is 20 percent. If this measure passes, the rate would go up to 39.6 percent.
Take Action Today!
As you can see, these potential changes could definitely trigger the need for an estate plan revision. If you act now, you can adjust your approach and preserve a larger portion of your legacy.
And as we have stated, your estate plan should be reviewed every couple of years so you can be certain that it is up to date at all times.
You can schedule a consultation at our estate planning offices in Glastonbury or Westport, Connecticut if you call us at 860-548-1000. If you would prefer to reach out electronically, fill out our contact form and we will get back in touch with you promptly.