You may wish you could prepare your estate plan, tuck it away and never have to address it again. However, reality always comes back to remind us that our lives are forever changing. As we go through life, we experience disruptions in our family dynamics, health and finances as well as overall economic changes. Our current state of uncertainty continues to have a lasting impact on many things, including your estate planning.
Since the beginning of the year, we have experienced fluctuations in the markets. We have also experienced historically low interest rates. The low interest rates, combined with a suppressed market value, make it an ideal time to take advantage of several estate planning techniques.
How the Gift and Estate Tax Exemption May Affect Your Estate Plan Today
We have had the benefit of the increased gift and estate tax exemption that came into play under the Tax Cuts and Jobs Act of 2017, which doubled the exemption in 2017 from $5.5 million to $11 million per person adjusted for inflation. Under the current law, this increased exemption will sunset at the end of December 31, 2025 to $5 million per person adjusted for inflation.
In 2020, the gift and estate tax exemption is $11.58 million per person. The exemption on the sunset date is expected to be somewhere between $6 million and $7 million per person, but there have been recent proposals that could reduce the exemption to $3.5 million per person and increase the top tax rate from 40% to 50-55% or higher. We have also heard discussions of possibly adding a capital gains tax at death.
We took a look at how tax reform is impacting the gift and estate tax exemption.
What You Can Do With Your Estate Plan Right Now
No one can predict if any of these proposed changes will take place, but discussions are happening that could reduce the gift and estate tax exemption sooner than the sunset at the end of December 31, 2025.
If you are planning to use the increase in the exemption that came about with the 2017 Tax Cuts and Jobs Act, you may want to do so sooner rather than later, or at least start talking to your estate tax planning advisors now to review alternatives.
There have been discussions that the changes could possibly be made retroactively, which could make legislation passed in the later part of 2021 become effective on January 1, 2021.
There are many issues a taxpayer may want to consider if they are planning to use the larger gift and estate tax exemption currently available during their lifetime. With the proposed changes being discussed to reduce the exemption, now may be the time to revisit your plan to ensure your plan allows the flexibility needed to adjust for potential changes in the exemption.
Understanding the Importance of Timing in Your Estate Plan
Timing is such a critical part of an estate plan. If you are looking to take advantage of planning in a low-interest-rate environment, using the higher exemption during lifetime or making changes to your estate planning documents, allow yourself ample time to have planning discussions with your gift and estate tax advisors—just in case changes to the current rates and exemptions happen sooner than the sunset date— so you don’t get caught needing to respond to any new legislative changes quickly.
Take a look at your planning options today to be most prepared for the future.