By: Stephen R. Elville – Managing Principal and Lead Attorney with Elville and Associates, P.C.
At the outset, you should understand that my purpose here is to alert clients, professional advisors, and others that the following information should be given credence and thoughtful consideration for the protection of assets, inheritances, and your general legacy, all of which may now be considered to be under attack (for all practical purposes) in 2021. Let’s begin with the following alert: the long-awaited Biden Administration legislative discussion about tax increases has begun. How do we know this? Because what was up until now only speculation throughout the 2020 presidential campaign, then further suggested in President Biden’s Green Book, now continues to take form and substance. On March 25, 2021, the “For the 99.5% Act” was introduced by Senator Bernie Sanders. Then, on March 29, 2021, the Van Hollen “Sensible Taxation and Equity Promotion (STEP) Act” was introduced by Senator Chris Van Hollen, Senator Sheldon Whitehouse, Senator Elizabeth Warren, and Senator Sanders. Then, on April 28, 2021, President Biden’s “American Families Plan”, was released by the White House. The 99.5% Act, as I will refer to it throughout the remainder of this Article, was co-sponsored by other prominent Senators, and according to Forbes, the bill is slated to be introduced into the House of Representatives (Forbes Magazine, Alan Gassman, Senate Estate and Gift Tax Bill Will Reduce Exemption to $3,500,000 And take Away Many Opportunities, March 27, 2021). The proposed 99.5% Act, in my view, represents the beginning of the real discussion, and is potentially the most impactful. Among many things being proposed (collectively) in these three Act proposals are the following: a reduction in the federal estate tax exemption to $3.5 million per person ($7 million for a married couple), but indexed for inflation and with no loss of “portability”; a reduction in the federal gift tax exemption to $1 million per person, but not indexed for inflation (it should be noted that if the federal estate tax exemption is decreased to this level, it is reasonable to think that the Maryland estate tax exemption will surely decrease as well, possibly to $1 million); progressive rate increases for the estate tax to 45%-65% (from the current 40%); capital gains tax increases – no stepped up basis at death for property owned by certain grantor trusts, and there are at least four (4) ideas being floated about potential changes/limitations in how capital gains are treated, including switching to a Canadian system-type approach where all capital gains are paid upon death (no cost basis adjustment), a system where capital gains are “trued up” and payable each year (“market to market”), or a carry-over basis; significant limitations on valuation discounting rules; limitations on annual exclusion gifts to $10,000 per donee (!), $20,000 per donor(!), and $30,000 per year to trusts! – these types of changes, if passed into law, would, for example significantly impact the traditional funding of common life insurance trusts; effective elimination of grantor retained annuity trusts (GRATS) as a viable planning tool; Generation Skipping Tax changes that impose significant limitations on the tax effectiveness of dynastical trusts (GST exemption limited to 50 years, for example); and more. Some good news – the Van Hollen (STEP) Act would provide for a $1,000,000 exclusion from capital gains tax, deductibility of capitals gains tax against estate tax owed at death, and a $500,000 capital gains tax exclusion for a primary residence – but with the downside that STEP would be retroactive to January 1, 2021! The American Families Plan would provide for a $2,500,000 exclusion from capital gains tax for a couple, bring back the SALT deduction, and leave the current $11.7 million per person (indexed for inflation) ($23.4 million per couple) basic exclusion amounts from estate and gift tax as is (at least for now at this stage in the discussions), but would otherwise increase the top income tax rate on individuals back to 39.6%, increase corporate tax rates from 21% to 28%, increase capital gains rates to 39.6% plus the 3.8% net investment income tax (combined 43.4%), or higher; and limit annual exclusion gifts in similar ways to the other proposals. But we simply do not know the outcome and what the compromises will ultimately be. The proposed tax changes in the 99.5% Act, STEP Act, and American Families Plan will have far reaching impacts on a substantial number of Americans for their estate and tax planning. Because the real discussion has begun, the question appears to be when and not if significant tax increases will occur. The real question is whether you (clients, professional advisors, and others) will be ready. Initial indications are that the coming six (6) months remaining in 2021 represent the ticking clock of time remaining to anticipate and prepare for these changes, subject to the retroactive provisions of the STEP Act and other potentially retroactive laws. Yes, let me repeat that. Political and economic indicators, a general consensus among many in the legal community (the estate planning community), and the effective dates set forth in these Acts (most are January 1, 2022) suggest that while there are no clear answers as to when such potential changes to the tax laws may or will occur, it is more likely than not that major changes in the laws will occur, and for those who have not already proactively engaged in advance planning, the remaining months of 2021 may be the last chance to do so.
So what does being proactive mean right now and what should clients (along with their professional advisors), and others do? Here is a brief checklist: As soon as possible:
(1) Contact your estate planning attorney, CPA, and financial advisor (your advisory planning team) to begin a discussion of the impacts of this possible legislation on your estate planning and tax planning. This discussion should include the very serious question of “how can we be assured that the advisory planning team you have assembled are working together in an organized and collaborative fashion?”;
(2) Review all advanced planning strategies for implementation in 2021 well before the proposed effective dates of these various Act proposals or other similar legislation (proposed effective dates mainly reference January 1, 2022, but some proposed legislation is slated to become effective January 1, 2021), including:
a. Educate yourself about the potential use of the current (large) temporary estate and gift tax exemption amounts before they go away (i.e. review gifting strategies – such as potentially making large gifts prior to 1/1/2022). This discussion should include understanding how gifting works in this context, and that only “larger gifts” will succeed in using the “temporary” exemption amounts, along with the possibility of “retroactivity” and how to protect against the possibility that any changes to the estate tax exemptions could be made effective retroactively to a date prior to any such gift(s);
b. Project future estate values;
c. Explore accelerating the implementation of grantor trusts in 2021;
d. Organize and potentially use annual exclusion gifts in 2021;
e. Plan for the possible end of the step-up in basis;
f. Understand all capital gains issues and how you could be affected;
g. Gain a working knowledge of the concept of “Portability” and how the Deceased Spouse’s Unused Exemption Amount (DSUE) is utilized;
h. Consider capturing valuation discounts in 2021;
i. Contemplate potentially paying estate tax for gifts prior to 2022;
j. Analyze the possibility of harvesting capital gains in 2021; and …
k. Grasp the many other proposed income tax, estate tax, gift tax, and GST tax changes being proposed by working closely with your Advisory Team.
(3) Review all basic planning considerations for implementation before (or as soon as possible after) the proposed effective dates of the possible legislation (proposed effective dates mainly reference January 1, 2022, but some proposed legislation is slated to become effective January 1, 2021). In closing, there are many flashing red lights and cautionary yellow lights in our lives, and oftentimes fewer green lights or completely clear paths for us to choose and follow. And certainly the state of political, civil, and cultural unrest in our country over the past few years has left many with more questions than answers.
But our job and commitment at Elville and Associates is to keep our clients, professional referral partners, and the community at large informed about changes in federal and state law affecting estate planning, elder law-related planning, and special needs planning. Along these lines therefore, the advice of this writer is to view the potential ramifications of the For the 99.5% Act, the Van Hollen STEP Act, and the American Families Plan and any similar proposed legislation that may arise in 2021, for what it is – a bright white light coming towards us in a straight line, seemingly from a fairly long distance away, but with a strangely familiar sound – a sound that as it gets closer begins to roar, reverberate, and shake the earth, as the shape of a locomotive comes into view. Our job and yours, is to be ready when this train arrives, and to not be left behind after the Biden-era tax law change caboose rolls past us and into the distance. I’ll leave it to your imagination about who the conductor will be.