Estate taxes have usually affected only the very wealthy at death. While the limits on the monetary value that a decedent can exempt from estate taxes routinely changes over time, we have seen wild swings in that amount over the last 20 years. Currently, the exemption stands at $11.7 million per person and $23.4 million for a married couple.  However, those amounts are poised to change yet again under legislation currently moving through Congress.

Current proposals

President Biden campaigned on a reduction in the exemption amount to $3.5 million person, an increase in the tax rate to 45%, and an elimination in the “stepped-up basis” rules. On September 13, the House Democrats introduced their proposals related to funding the $3.5 trillion budget bill, and key details differed from the Biden plan in every respect.

The current proposals include reducing the exemption amount to an inflation-adjusted $5 million (roughly $6 million starting in 2022), no adjustment in the tax rate, and no mention of the stepped-up basis rules. Democratic lawmakers did, however, target commonly used grantor trusts and family limited partnerships.

Gift now

In light of these proposals, the most important thing to do is revisit your estate plans now. Even if the potential changes don’t appear to affect you, we recommend reviewing your documents, goals, and intentions so you can stay prepared.

For example, consider making gifts as soon as possible, either outright or in a trust. This can be beneficial for two reasons:

1. While the exemption is currently $11.7 million per person, there is no claw-back provision if the exemption is lowered. Giving $11.7 million this year will allow $5.7 million to escape transfer taxes in the future. You can decide this any time before the end of 2021.
2. The grantor trust rules allow grandfathering of all trusts in place prior to the date of enactment. This is a common estate-planning strategy used to gift assets to loved ones in a controlled and tax efficient way. However, now is the time to act; you probably cannot afford to wait until the end of the year.

Revisit estate plans before end of year

If you have a sizeable estate, we can’t stress enough the need to start preparing for these changes right away. Not only would a trust need to be created as soon as possible, but it also must be funded. The proposals in Congress would cause any new assets added to an existing trust to be taxed as a capital transaction and be included in the grantor’s estate at death.

If you have considered adding assets to an existing trust, make those transfers as quickly as possible to avoid being ensnared by the proposed estate tax changes. It appears that none of the tax proposals would be retroactive and that most would start January 1, 2022. However, several important provisions would go into effect as of the date of enactment—most likely within the next month or two.

Mercer Advisors provides the estate planning tools to help you guide your loved ones, safeguard your legacy, and allow your wealth to have a direct and lasting impact. Speak with an advisor to get started.