Regardless of which industry you are in, you will need to pay some form of tax to the federal government at some point during your life. The amount of taxes that you need to pay are based on a number of factors including your income and your family size. What many people don’t realize, however, is that depending on the monetary amount you leave behind, your estate may need to pay taxes on those funds. The Biden administration and Congress are working to take steps to change the current laws associated with federal estate taxes that could have a direct impact on the way that you formulate your estate plan.
- A decrease in the estate tax exemption
Currently, if you are single and your estate (everything you own) is not worth more than $11.7 million (or $23.4 million for a married couple), you won’t have to worry about federal estate tax. However, the proposed changes would drastically change this. It’s been proposed that these numbers should roughly be cut in half for both married and single individuals. To be fair, this decrease in the estate tax exemption was already slated to take place in 2026 if not extended, but the current legislation would accelerate that date forward. An estate tax exemption of around $6 million per spouse will likely still be sufficient to pass the vast majority of estates on to children free of any estate tax encumbrance, but it’s important for everyone to have a plan and know what to do when one spouse passes away in order to avoid any tax consequences for the kids. - Changes to minimum distributions from IRAs
If you are big saver in the form of retirement accounts (IRA, Roth IRA, or deferred retirement plans) that have an aggregate balance of more than $10 million dollars, you’ll no longer be allowed to contribute to those retirement plans and must take a required minimum distribution of at least 50% of the value over the limit the following year. The 2019 SECURE act, already in place, brought major changes to inherited IRAs and deferred retirement accounts in that they can no longer be stretched over the beneficiaries lifetime and instead must be withdrawn within ten years. With these changes, you may reconsider your strategy around large deferred retirement accounts. - Elimination in Step-Up Basis
The jury is still out as to whether or not the newest federal tax laws will come with an elimination in a step up in basis. Fortunately, the most recent proposal out of committee at the time of this writing did NOT include an elimination of step up in basis, but let’s discuss it since it was proposed. A step up in basis is particularly advantageous to beneficiaries of an estate. If a person dies owning a home, for example, and the home has grown in value during the course of that person’s lifetime, the beneficiaries would inherit that home and could sell it without having to pay capital gains tax on the increase of the home’s value during the decedents lifetime, assuming they sold the home soon after inheritance before further appreciation occurs. The same is true for other assets like stock, etc. Eliminating the step up in basis would bring about a massive tax on many every day people, and as a Country we have never coupled an elimination of step up in basis with an Estate tax, as the tax consequences are absolutely shocking.
There have also been proposals to treat death as a sale for capital gains purposes. This is a particularly dangerous proposal, as in many cases children would be forced to liquidate an estate just to pay a tax bill and often would not be able to keep a family home or business. Couple this with an increase in the capital gains rate (and capital gains being treated as income in California), and you’ve arrived at a triple threat to the American middle class that would absolutely crush the few remaining California middle class families who exist.
Related post: 4 Benefits of Having an Estate Plan
Timing is Key
Similar to any other proposed form of legislation, it’s unclear if these changes will truly go into effect at the end of this year although the odds are high that there will be some type of changes to the federal estate tax law. As experienced estate planning lawyers, we believe that it is our responsibility to closely monitor this situation. If these changes were to go into effect, they will do so on January 1, 2022 (unless Congress makes them retroactive!), which is why we strongly encourage you to schedule your free consultation with our attorneys today to review your estate plan.
Speak with Our Estate Planning Attorney in San Diego Today
Whether you have current estate planning paperwork in place that needs to be updated or you would like to get your affairs in order and reduce the stress that is often associated with the probate process, our estate planning attorneys in San Diego can help you. We’re always happy to take the time to sit down with our client and walk them through the process of putting together an estate plan that suits their individual needs. For more information or to schedule your appointment, please get in touch with us. Remember, we are here, and we are always ready to help.
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