Since the Georgia Senate election and Democrats gaining enough votes to pass tax legislation on their own, it’s been anticipated that changes will be coming to the estate/gift tax. Vermont Senator Bernie Sanders has now introduced a bill that would do just that and make significant changes to these laws.
The bill would lower the estate tax exemption from $11.7MM per spouse ($23.4MM per couple) to $3.5MM per person ($7MM per couple). It would also increase the estate tax rate from 40% to at least 45%. Significantly, it would lower the gift tax exemption to $1MM. Finally, it would eliminate many planning techniques that have been used to reduce or eliminate estate taxes for individuals and business owners.
With these possible changes to come, here are some recommendations to consider:
- Don’t wait to plan. The bill is proposed to take effect on January 1, 2022. However, many of the provisions that eliminate planning that could significantly reduce or eliminate estate taxes would take effect on the date of the bill’s passing. It’s uncertain when this could be and it’s also possible Congress could modify the bill so that all of the changes are effective upon enactment. Passage of this bill could be in the fall or potentially earlier.
- Make transfers to a trust to be “grandfathered” in under the current law. Current estate and gift tax exemptions are structured as “use it or lose it.” In other words, if the estate/gift exemptions change from $11.7MM per person ($23.4MM per couple) to $3.5MM per person ($7MM per couple) and only $1M per person, the excess exemption amounts will be lost. To benefit from this, consider creating a trust for the benefit of your spouse or children. This would allow these assets to avoid the estate/gift tax and also have the growth protected from these taxes.
- Accelerate family business succession planning. Succession planning for a business often involves a combination of selling and gifting assets to the next generation. Doing this planning after changes take effect could be dramatically different. If the gift tax exemption is lowered to $1MM, this would severely limit succession planning. Consider accelerating at least the gifting portion of family business succession so you can avoid the gift tax and be “grandfathered” in under the existing exemption amounts.