Is Now the Time to Update Your Estate Plan?

By Kenneth H. Bridges, CPA, PFS December 2021

Legislation proposed earlier in the year would have accelerated (to 2022) a significant decrease in the estate tax exemption (currently scheduled for 2026) and eliminated the basis step-up at death rule and curtailed the ability to do estate planning with grantor trusts.  This sent many high-net-worth individuals scurrying to see their estate planning attorney. 

While the legislation passed by the U.S. House in November (and currently being debated by the Senate) did not include these provisions (thus somewhat alleviating the fire drill), now may still be a good time to review and update your estate plan.  Here is a general overview of the current estate and gift tax rules.

There is no U.S. Federal “inheritance tax” (i.e. tax on the receipt of inherited wealth), but there is a Federal estate and gift tax (collectively referred to as the “uniform transfer tax”) on the privilege of transferring wealth for less than full and adequate consideration to noncharitable recipients. A few states have an estate tax, an inheritance tax, or both.  As a practical matter, the estate and gift tax operate much like an inheritance tax, in that they serve to limit the amount of wealth that can be inherited.  Also, while the estate and gift tax are assessed on the transferor, the recipient may be liable for tax under transferee liability rules if they receive property via gift or inheritance from someone who has an unpaid tax obligation.

Under present law, for 2021 the lifetime exemption equivalent from Federal estate and gift tax is $11.7 million (per spouse), so the estate and gift tax is a fairly high class problem.  In addition to this lifetime amount, there is an annual exclusion of $15,000 per donee ($16,000 effective for 2022) that does not count against your lifetime exemption.  So, for example, a husband and wife could give up to $60,000 per year to their son and daughter-in-law without reducing their lifetime exemption.

The estate tax rate starts at 18%, and quickly rises to 40%. 

Over the years, depending on which political party is in power, there has been talk of either repealing the estate tax (Republicans) or expanding it (Democrats) by reducing the exemption amount and increasing the rate.  Under present law, the exemption amount will increase for inflation each year through 2025, and then in 2026 revert back to $5 million (as indexed for inflation since 2010). 

A person’s taxable estate generally includes all assets they own directly or indirectly (including through a revocable trust) at the time of their death, including the face value of any life insurance in which they have any incidents of ownership and certain assets transferred within three years of death. In computing the estate tax, you add to this amount any gifts made during life in excess of the annual exclusion, and then (in effect) reduce it by the exemption equivalent amount.

Any amounts left to charity are not subject to the estate tax.

Those who anticipate they may have an estate (after charitable bequests) in excess of the exemption equivalent amount and want to minimize the estate tax can do so by making lifetime transfers to take advantage of potential discounts to valuation (e.g. for nonmarketable minority ownership), remove future appreciation from their estate, and take advantage of the presently high exemption equivalent which may be reduced in the future.  A combination of a family partnership and trusts can be a very effective way of making these transfers in a tax efficient manner, while also enjoying creditor protection benefits.

Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP, an Atlanta-based CPA firm.

This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice.  The article provides only a very general summary of complex rules.  For advice on how these rules may apply to your specific situation, contact a professional tax advisor.