The blue storm is now on the horizon with democratic control in both congress houses. The actual timing and scope of income tax and estate tax legislation is still uncertain, and there may still be time to plan ahead before changes come into effect.
We expect more income tax breaks for the low-income earners who spend all their dollars to support economic recovery and higher rates for the high-income earners to replenish our pandemic-depleted coffers. Changes in estate tax rules that affect high net worth individuals may also occur, but I understand that the income generated by changes in estate tax will be dwarfed by changes in income tax and is therefore a lower priority for Congress. Note that income and estate tax planning must take into account the possibility that Congress may make retrospective changes to tax law. However, changes typically take effect on the date set by Congress or at the beginning of the next calendar year. The Biden administration has proposed sweeping changes and now it is just a matter of when and how much.
The current Gift, Estate, and Generation Tax (GST) tax exemption amount is $ 11,700,000 per person. This exemption amount is currently required by law to be reduced by 50% to around $ 6 million per person in 2026, depending on the inflation adjustments. This reduction is required by law and has created an opportunity for high net worth individuals to use or lose. However, the following suggestions for a Biden campaign are much more dramatic and may change estate tax rules this year or next:
• Reduce Estate and GST Exemptions to $ 3,500,000 and allow only $ 1M in tax-free gifts for life.
• Increase estate tax rates significantly from 40% to unknown percentages.
• Eliminate the stricter basic rules in death. That would be a massive change and a carryover basis could result in income tax on death or later sale of all valued property – details unknown.
• Limit review discounts between family members.
• Add Grantor Trusts to the Grantor's Estate and avoid using short-term Grantor Retention Annuity Trusts (GRATs).
• Limit the duration of GST trusts.
Because of the suggestions above, there is an urgent need to consider your estate tax planning now and in the future. It is always best to get into your estate and succession planning now, but finding the time and making many difficult decisions is not easy. Wealthy parents always emphasize about gifts and whether and what type of trust should be built, with concerns about lessening their children's incentive to develop fully.
Estate planning is a process, not a one-time fiduciary agreement. When you are better trained in this process by your trusted advisers, including your lawyer, accountant, wealth and insurance advisor, your ability to make decisions will become easier.
Some discount and gift options to be considered under applicable law:
• Use your annual bargain gifts of up to $ 15,000 US $ 30,000 per person if both parents give that person gifts. Over time, these gifts accumulate in significant quantities. Direct payments to a medical service provider or tuition fees for related or unrelated individuals are not considered gifts.
• • Make great gifts of assets with values depressed and subject to discounts. Take advantage of the current $ 11,700,000 flat loan with gifts of shares in real estate and / or ownership interests in a family or related company that are eligible for valuation discounts. To protect against retrospective changes in the $ 11.7 million gift exemption amount, planners must avoid using disclaimers, formulas, and / or using QTIP (Life-Time Qualified Terminal Interest Property).
• • Make low interest loans to children. Loans for home or business opportunities are very attractive. The applicable federal rates (AFR) in January 2021 are 0.14% for loans with a term of three years or less, 0.52% for loans with a term of more than three years and a maximum of nine years and 1.35% for loans Loans more than nine years.
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