Four Ways To Get Ahead of Potential Estate Tax Changes

by Arden Trust

Organizing your estate plan is critical to protecting your beneficiaries. Potential tax changes aside, your plan should focus on supporting your heirs and outlining how assets will be distributed.

However, with multiple legislative proposals on the table that may impact your estate, now is an ideal time to revisit your plan. Potential changes include lower exemption rates, the removal of the step-up in basis for assets passing at death, and the elimination of some tax-efficient estate planning techniques

If the proposed changes in Washington have you worried about your heirs’ tax bill to Uncle Sam, here are a few strategies to consider:

1. Maximize the annual gift exemption. For 2021, the annual gift-tax exclusion is $15,000 per donor, per recipient. A giver can give anyone — such as a relative, friend, or even a stranger — up to $15,000 in assets a year, free of federal gift taxes. Spouses can join in the gifts, which doubles the tax-free gift each year to $30,000 per recipient. Proposals under consideration would cap the yearly gift-tax exclusion to as little as $20,000 to $50,000 for all recipients.
2. Leverage the lifetime estate and gift tax exemption. The current lifetime estate and gift tax exemption of $11.7 million is set to decrease to $5.3 million in 2026, and an even lower threshold could be on the horizon under the new administration. To maximize on the current exemption rate, you can gift a piece of your estate to a trust fund for a spouse or an heir. By doing so, your gift will be grandfathered in at the higher exemption rate before any changes to tax law are enacted at year end.
3. Fund a Grantor Retained Annuity Trust (GRAT). For assets expected to appreciate, consider placing them in a GRAT. With this method, an irrevocable trust provides an annuity to its beneficiary that stems from the appreciating assets and is paid out on a yearly basis for a predetermined amount of time. Once the trust expires, the beneficiary receives the remaining assets tax-free.
4. Make charitable gifts. With a Charitable Remainder Trust, a large sum of money can be placed into the trust that will then pay a fixed annuity each year, benefitting you or your loved ones while living. The remainder of your trust then passes onto the charity of your choice upon passing.

If it appears unlikely estate tax laws will be passed this year, there will be a rush of individuals seeking to make large gifts before the end of 2021. If you’re one of the many putting it off, get in contact with your legal professional to mobilize on any opportunistic planning now.

As we’ve mentioned before, talk often turns to getting ahead of the curve during every change in administration. While these strategies are important to consider amid pending legislative proposals, it is always a good time to update your estate plan. Your plan should be vested in what you can do for your family and how assets should be distributed, and not in changes that may or may not be coming down the pike.

Arden Trust Company does not provide legal or tax advice. Please consult a legal or tax professional for advice specific to your circumstances.