This may seem odd, but we need to believe and listen to what the politicians are saying.
Regardless of your political views, tax laws are set to become less favorable this year (unless you consider more taxes to be favorable). Notably, the credit you will have for estate and gift taxes will be reduced.
Review: The federal estate tax allows a “unified credit” for every person. The unified credit is the amount that the federal government will allow each person to pass to the next generation before any federal estate tax is owed. The unified credit applies to transfers at death (generally to anyone other than a spouse or charity), and to large gifts during life (over the $15,000 per person annual gift tax exclusion amount).
The unified credit is $11.7 million in 2021, and will be adjusted each year for inflation. Any amount above that will generally be taxed at a rate of 40%.
HOWEVER, the Biden administration has proposed (many times over the last year – this isn’t recent news) a reduction of the unified credit to $3.5 million. More likely, they will cut the current credit in half, leaving approximately $6 million per person.
Congress can reduce the estate tax exemption with a majority vote, the filibuster will not come into play. Technically, they could make the estate tax change retroactive to January 1, 2021, but that is highly unlikely for the estate and gift tax (perhaps more likely for the income tax changes). It is expected that Congress will make the estate / gift tax change effective either (i) the day they pass the law, or (ii) January 1, 2022.
Therefore, this year presents a unique window of opportunity to make large non-charitable gifts, whether those gifts are to a child, grandchild, trust, or some other person or entity. If you act now, there are significant tax saving opportunities. As we all know, it is easy to put off today what we can do tomorrow… but putting this off could cost your estate millions of dollars.
You should make an appointment if either of the following are true:
- If the value of your estate is greater than $6 million (or $10 million if married). As a reminder, the IRS does not go by assessed value, balance sheet value, or production value – the IRS only cares about fair market value.
- If you have not seen an estate planning attorney since 2016. There were some tax law changes in 2016 that provide a great benefit to South Dakota residents if you have certain language in your Trust.
You still have a chance to get grandfathered in.
None of the above has to change the “who gets what” of your plan. There are just some tax planning conversations you should have. In the end, you might make an appointment (by calling: 605-362-9100), pop the hood on your plan, and discover nothing needs to be done. Either way, it’s worth the check.