When planning your estate, your goal is usually to minimize taxes and maximize the value of your assets for your heirs. However, estate planning is complex, and tax laws are constantly changing. As a result, it helps to keep up with the latest changes in tax law so you can adjust your estate plan accordingly. Keystone Law Firm can help you stay up-to-date on the latest tax law and estate planning changes so you can protect your assets.
Undoubtedly, changes in tax laws could impact your plan, especially if they take effect. Hence, you may need to map out different scenarios and contingency plans to ensure your estate is still in good shape, no matter what changes come down the road. Here’re some of the significant changes in tax law that could impact your estate plan:
The estate tax exemption is the amount of money you can pass on to your heirs without incurring estate taxes. The federal government adjusts the estate tax exemption amount every year for inflation. In 2022, the amount is $12.06 million; in 2019, the exemption stood at $11.4 million per person (double the amount for a married couple). This implies if you die with less than $12.06 million in assets, your heirs won’t have to pay federal estate taxes.
If the exemption amount decreases, it could significantly impact your estate plan. Why? Because fewer assets would be exempt from estate taxes, which could result in a larger tax bill for your heirs.
Take the case of the Tax Cuts and Jobs Act in 2017, for instance. The law made significant changes to the estate tax, including doubling the exemption amount. As a result, far fewer estates are subject to the estate tax. That said, the changes are temporary and are expected to revert to pre-2017 levels in 2026.
So, how would that impact your plan? For starters, you may consider making gifts while the higher exemption amount is still in place. This would allow you to transfer more assets to your heirs without incurring estate taxes. Also, it might help to revisit your estate plan to ensure it’s still structured in the most tax-efficient way possible.
2. Tax Rate
A proposal to raise the estate tax rate is still under discussion. If it becomes law, the estate tax rate could increase from the current 18 to 40 percent to 45 percent.
While this may not seem like a significant change, it would eat into the value of your estate – especially if you have a large one. So, if you’re concerned about how this could affect your estate plan, consult an experienced attorney to help you fine-tune your plan.
3. Periodic Taxation of Unrealized Appreciation in Assets
Unrealized appreciation in trust assets is the difference between the original cost of an asset and its current market value. For example, let’s say you bought a stock for $100 that’s now worth $200. The unrealized appreciation would be $100.
Under the current rules, unrealized appreciation is not taxed until the asset is sold. However, a proposal under discussion could change the rules so that unrealized appreciation would be taxed periodically – say, every five years after death or ten years after that.
This could significantly impact estate planning strategies that involve trusts, such as GRATs, QPRTs, and CRTs (a topic for a different seating, perhaps). In short, if the proposal becomes law, it could make these types of trusts much less attractive from a tax perspective. So, if you’re considering using one of these trusts as part of your estate plan, you may want to act soon.
4. Elimination of the Cost-basis Step-up
We know – it’s probably a mouthful, but hang on for a sec. Basically, the cost basis is the original purchase price of an asset. When you sell the asset, the capital gains tax is based on the cost and sales price difference.
Now, under current rules, the cost basis of an asset is stepped up to its fair market value at death. So, if you inherit an asset from someone who died, your cost basis would be the asset’s value at the time of death.
A proposal to do away with the step-up in basis would thus impact your estate plan. If the proposal becomes law, it would mean that your cost basis would not be increased to the fair market value at death. This, in turn, could result in a more significant capital gains tax bill when you sell the asset.
What do these proposals mean for you and your estate plan? Well, it depends. If the proposed changes become law, they could affect your estate and heirs. As such, it pays to stay informed about the changes and how they might impact your plan. You also need to be proactive. If you’re concerned about how a change might alter your plan, talk with your attorney to see what, if anything, you need to do to keep your plan on track.