Prepare Your Estate for Higher Taxes

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As we head into the fall, discussions about federal tax legislation are ramping up in Washington D.C. Sweeping estate tax changes have been proposed, including a reduced estate and gift tax exemption, higher estate tax rates, and a repeal of the step-up in basis rule.

Although these changes are a long way from fruition and likely won’t be enacted in their current form, now is a great time to consider estate planning strategies so that you’re prepared for possible changes.

  • Plan for a lower exemption threshold. The Tax Cuts and Jobs Act (TCJA) doubled the exemption from $5 million to $10 million with inflation indexing ($11.7 million in 2021). After 2025, it is scheduled to revert back to $5 million, but it may scale back to $3.5 million before then and limit the lifetime gift exemption to $1 million. Be prepared to amend trusts and wills to reflect these potential reductions.
  • Plan for a higher estate tax rate. The top estate tax rate of 40% has remained in effect since 2013, but could be increased in conjunction with other changes. A higher tax could expose more assets to estate tax. Consider reducing the size of your taxable estate through lifetime gifts and other strategies.
  • Plan for eliminating step-up in basis. For estate tax purposes, the value of inherited assets is stepped up to its fair market value on the date of death. Therefore, if an heir sells inherited assets soon after death, there’s usually little or no income tax liability. If this rule is repealed, heirs may face a much higher capital gains tax (The current proposal provides a $1 million exemption). Consider shifting appreciated property out of your estate if this change is made.
  • Plan for other related changes. Another proposal would hike the tax rate for long-term gains from 20% to 39.6% for individuals earning more than $1 million a year. Higher-income taxpayers would also continue to grapple with the 3.8% net investment income tax on top of any capital gains tax. This one could really hurt farm families and small business owners looking to sell.

The combination of a higher capital gains tax and the rollback of estate tax breaks may necessitate changing your estate’s tax plan. And if you are planning on passing a business or farm to heirs it is more important than ever to consider your options. Please call if you have any questions on how to proceed.

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