Estate planning should be viewed as an ongoing process. The initial plan will be based on the circumstances that existed at that time, but the only constant is change.
Circumstances in your life can trigger the need for estate plan updates, including a change in marital status, additions and subtractions to the family, and an improvement in your financial position.
In addition to these events that are unique to you, laws that impact aspects of a typical estate plan can and do change as the years pass.
At the present time, there are a handful of relevant legislative measures making their way through Congress, and we will look at two of them here.
For the 99.5 Percent Act
At the present time, the federal estate tax exclusion is at the highest level we have ever seen. The exclusion is the amount that can be transferred before the estate tax would be levied on the remainder.
It was doubled when the Tax Cuts and Jobs Act was enacted at the end of 2017. At that time, it went up to $11.18 million, and it has been adjusted annually since then to account for inflation.
In 2021, the federal estate tax exclusion is $11.7, and the maximum rate of the tax is 40 percent.
Senator Bernie Sanders of Vermont has introduced the For the 99.5 Percent Act. It would decrease the exclusion to $3.5 million, and it would increase the rate to 45 percent.
There is a federal gift tax in place to stop people from giving lifetime gifts in an effort to avoid the estate tax. At the present time, the $11.7 million exclusion is a unified exclusion that applies to lifetime gifts and the estate that will be transferred after your passing.
The For the 99.5 Percent Act would reduce the gift tax exemption to just $1 million. These changes would be quite significant, but the bill will be met with a lot of resistance.
However, the exclusion is going to plummet even if this measure does not pass. The provision in the Tax Cuts and Jobs Act that established the record high exclusion is going to sunset at the end of 2025.
In 2026, it will go down to $5.49 million. If this change will impact your estate, you should definitely discuss an estate tax efficiency strategy with your attorney sooner rather than later.
Sensible Taxation and Equity Promotion (STEP) Act
The other piece of legislation that is making its way along the path is the Sensible Taxation and Equity Promotion Act. This measure would significantly impact transfers of appreciated inherited assets
At the present time, if you inherit assets that appreciated during the life of the person that left you the inheritance, the resources would get a stepped-up basis. You would not be required to pay capital gains taxes on the appreciation that accumulated during the decedent’s lifetime.
Very wealthy people have traditionally used the step-up in basis to transfer generational wealth in a tax-free manner. Under the terms of the STEP Act, the first $1 million transferred would get the step-up in basis, and the rest would be subject to capital gains taxes.
Right now, the maximum capital gains rate is 20 percent, but this measure would increase it to 39.6 percent.
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