The changing of the administration at the White House and in Congress has already brought several significant policy changes, and it is likely to bring about more. While it is still unclear what specific changes can be expected on the tax front, when it comes to estate planning and the transfer of wealth now is a good time to investigate steps that could minimize the impact on any future transfer of wealth within your family.
When the Tax Cut and Jobs Act of 2017 was passed, it significantly increased the exemption for federal estate and gift taxes. By the 2021 tax year, the threshold for paying estate taxes for individuals was raised to estates valued above $11.7 million, up from estates valued above $5.49 million in 2017. For married couples, the threshold is double that for individuals, or $23.4 million for the 2021 tax year. These increases are set to expire at the end of 2025, reverting to the previous lower exemption levels. It’s likely that these levels will be coming down sooner. In fact, the Senate is considering a bill calling for federal estate tax exemptions to be lowered to $3.5 million beginning in 2022.
Based on the likelihood of an impending estate tax increase, anyone whose estate is worth north of $3 million, and is likely to be transferred at any point in the near future, should consider transferring some wealth before the end of 2021. Following are a couple ways to consider doing so:
Irrevocable trusts are a good way to gift assets and protect them from federal estate taxes, whether to a spouse, children, or grandchildren. By removing assets from your estate and housing them within such trusts, your assets can be passed along to your heirs tax-free following your death, and you can continue to pull regular income for yourself while you are still alive.
Transferring minority interests in a family business to heirs is another way to avoid the future payment of hefty estate taxes if the business does not change hands until the time of your death. Since a minority interest in a business is not viewed as attractive as a majority interest, the value of such transfers are able to be discounted below fair market value, resulting in a far lower tax bill for your heirs than if they inherit the same business at the time of your death and must pay estate taxes based on its fair market value.
Given the complicated nature of the above strategies and the uncertainty of any future IRS or legislative action, along with differing rules regarding how estate taxes are handled among the states, anyone interested in pursuing these tactics should consult a qualified accountant or financial advisor.