Proposed Estate Law Tax Changes:
What You Need To Know, Part II
(Note: This article was contributed by our Law Clerk, Lindsay Keough.)
Part I of this two-part series covered three proposed changes to federal estate tax law that are currently being considered by the United States House of Representatives: (1) reduced federal gift and estate tax exemptions, (2) increased income tax rates, and (3) an estate tax imposed on grantor trusts. In this article, you will learn what these changes mean for those who have not yet created an estate plan, as well as tips for how to take advantage of important benefits before they are gone for good.
#1 “Use it or lose it” exemptions
Although the proposed legislation has not yet been enacted, the possibility of the above-mentioned changes being signed into law has already created a “use it or lose it” situation for individuals who do not have estate plans in place. As explained in Part I, the proposal aims to cut the federal gift and estate tax exemptions in half from $11.7M to $6M for individuals and $23.4M to $12M for married couples. This means that if you as an individual or you and your spouse together plan on transferring assets to beneficiaries during life or death that amount to more than $6M or $12M, you would incur a federal gift or estate tax on these transfers if they are made after the proposal is passed.
However, if you make a gift or set up an irrevocable trust to transfer assets before the proposal is enacted, the reduced exemption rate will not apply, meaning that transfers up to $11.7M for individuals and $23.4M for married couples will still be protected from gift or estate tax. Quite simply, the time to act is now.
#2 Financial planning adjustments
Also explained in Part I is the proposed increase in income tax rates for individuals, estates and trusts. Specifically, the proposal seeks to increase the highest or “marginal” income tax rate from 37% to 39.6% for individuals, trusts, and estates. This increase could require adjustments to your financial plan, such as accelerating income or deductions and/or rethinking your current individual retirement account type. Additionally, the increased income tax rate for trusts and estates would create a problem for those who want the special protections that come with naming a trust as a beneficiary, as doing so might result in incurring a doubled income tax rate.
Individuals who might be impacted by the increased income tax rates should consult with an experienced financial planner and estate planning professional as soon as possible to ensure that they are protected before the window of opportunity closes.
#3 Grantor trusts restricted
Under current law, grantor trusts are considered outside of the owner’s estate when they die. This provides substantial estate planning tax benefits by shielding the trust from the federal estate tax. However, if the proposed legislation is passed, any grantor trust created on or after the date of enactment will be included in one’s estate. The same applies to new gifts made to existing grantor trusts, meaning that although grantor trusts created prior to the date of enactment are “grandfathered,” any gifts made to them will be subject to inclusion in one’s estate. Therefore, individuals planning on utilizing the benefits of grantor trusts must take immediate estate planning action before time runs out.
To recap, Parts I and II of this series covered three proposed estate law tax changes and how they might affect individuals who have not created estate plans. Remember, although the proposed changes are still being considered by our country’s lawmakers, the time to act is now. Your chances of missing out on important estate planning tax benefits increase with each day that you delay getting your affairs in order. Avoid taking a risk that you cannot afford. Reach out to experienced estate planning and financial planning professionals now to see how you can protect yourself, your family and your finances before the changes take effect.