What Are the Tax-Saving Possibilities in Your Estate Plan?
There are changes that are coming with a new Presidential administration in 2021. Changes in the Federal Tax Code are expected to be announced soon. At Phelps LaClair, serving Mesa, Chandler, Scottsdale, and the Phoenix Valley, we know one of the questions will concern the need to pay a trust distribution tax. What many want to know is: what are the tax-saving possibilities?
Will Taxes Increase?
It is often said that it’s not how much you make that counts, it’s how much you can keep. The proposals that have been put forth indicate that it will be harder to keep what you have earned. By reversing some of the Trump tax cuts, Joe Biden has indicated that there will be higher taxes on the wealthy and on corporations. This could also apply to the gift and estate tax exemption.
Estate Tax Exemption
Before 2018, the gift and estate tax exemption was set at $5.4 million. In December 2017, the Tax Cuts and Jobs Act increased the amount you can gift to others without a penalty at $11.4 million. Amounts higher than that were subject to a 40% gift and estate tax. In 2020, the exemption increased to $11.6 million. That is due to expire at the end of 2025. Then, the exemption will fall back to $5.4 million.
It is likely that a Biden tax plan will end the Tax Cuts and Jobs Act sooner. In that case, a higher tax rate of 45% would be triggered by assets of around $3.5 million. The current Congress would also eliminate the step up in basis. This would cause unrealized capital gains to be taxed at death.
These changes could come into effect as soon as 2022. For those of you who are planning to gift a significant amount of their estate assets in order to reduce estate taxes, it is best to do it sooner rather than later. In a recent ruling, the IRS said that the assets gifted between 2018 and 2025 will not be counted against the estate after the tax overhaul expires in 2026. That means that the window of greatest opportunity is open now. But it may not remain open for very long.
When to Give?
Every large gift that you give moves assets (and appreciation) out of your estate, reducing the amount that is subject to estate tax when you die. If your estate is valued at more than $11.4 million, your heirs will thank you for it. However, if your estate is valued at less that $5 million, the advantage of the larger exemption is lost because it would fall under the $5.4 million ceiling in 2026 (or sooner). In that case, we advise keeping the assets in the estate and letting your heirs deal with any potential capital gains tax. The beneficiaries will not need to pay capital gains if they sell the assets immediately.
Other Tax Changes
In every election year, there are changes that will result from incoming administrations. This year is no exception. The Biden tax plan will lead to 1.9% to 7.7% less after-tax income for most people. Corporate taxes will increase, and a 12.4% Social Security payroll tax will be imposed on individuals earning more than $400,000. It will be to your advantage to keep abreast of all changes to the tax code.
Estate Planning Attorneys in Phoenix
As a second-generation estate planning firm, Phelps LaClair has the experience to design a custom plan for every estate. We design every estate plan to take advantage of all available tax-saving possibilities. We will help you find the best vehicle for your situation, that will cover everything from long-term care planning to trust distribution tax. Call us today for an appointment. It’s never too early to plan wisely.