2020 has proved eventful to say the least. From COVID-19 to a hotly-contested presidential election, many are wondering what 2021 has in store. From an estate planning perspective, the coming years will likely bring many changes. There are no guarantees, but we can make some educated guesses and plan accordingly.
Exemptions are Scheduled to Sunset
The estate and gift, and generation-skipping transfer, tax exemption is currently at $11.58 million per person ($23,160,000 for married couples), indexed for inflation through 2025. Absent any legislative action, the exemption will “sunset” in 2026 and revert to $5 million indexed for inflation from 2011. With the incoming Biden administration, and the potential for a Democrat-controlled Congress, the exemption may be lowered even further and prior to 2026. In addition, the Biden tax platform mentions ending the income tax benefits of a step-up in basis on appreciated property at death. Although the future remains unclear, individuals should take advantage of existing tax planning strategies before changes are implemented.
Gifting Now
Individuals and couples effected by the reduction in tax-free wealth that can be transferred should consider making taxable gifts immediately. The IRS has confirmed that there will be no “clawback” of the future tax exemptions. In other words, gifts made now will retain the current exemption and will not be penalized at the lower tax exemptions in the future. Therefore, there is no better time to take advantage of tax-free gifting without concerns of tax liability in the future.
Check Existing Estate Planning Documents
Now is the time to review your existing estate planning documents to ensure that they accommodate potential changes to the law and implement your wishes. You should speak with an estate planning attorney to determine what changes, if any, should be made to these documents. Proper planning now could prevent adverse consequences later.