Congress is deliberating some of the most significant estate and gift tax changes in decades. The proposals being considered are for substantial increases in estate and gift taxes for many Americans.
Most people say that they’ll simply wait to see what Congress does before considering changes to their estate plans.But there’s a big risk to that approach.
Any law Congress passes this year is likely to be enacted this fall and take effect as of January 1, 2022. The calendars of estate planners will be filled quickly by clients looking to take action by the end of 2021. You might not be able to talk with a planner before the end of the year, much less have your plan changed by then.
The more wealth you have, the more important it is that you take some actions soon. The highest-risk group is people with estates valued between $7 million and $10 million. They comfortably avoid estate and gift taxes now but are the ones most likely to be snared by the taxes under most of the proposed changes.
If Congress doesn’t act, this group will face higher taxes when the 2017 law expires after 2025 and the lifetime exemptions are cut in half.
I don’t recommend that you try to predict the actions Congress will take either this year or over the coming years and decades. Instead, whatever your age, start talking to your estate planner now. Create options for different likely scenarios.
Make decisions about the actions you’d want to take under different scenarios. When documents would need to be created to execute certain actions, have the estate planner prepare drafts of the documents now. It is possible Congress won’t have enough members agree on a proposal to enact anything, and you’ll view the fees as wasted.
But if Congress does enact significant changes, this is likely the only way you’ll be able to execute your strategies before the new laws take effect. You can think of the fees as insurance against a major change.Another strategy is to make gifts now that remove assets from your estate. But make gifts that can be undone. For example, you can create a trust that has disclaimer provisions.
If the beneficiary disclaims a gift to the trust within a certain period after the gift is made, the gift reverts back to you. If you have a good relationship with the beneficiary, you can make the gift to the trust now. If there’s no new law by the end of the year, the beneficiary disclaims the gift.
If a new law is enacted and it’s beneficial to have those assets out of your estate, the beneficiary takes no action. The gifts are out of your estate and in the trust.As part of the planning process, update your retirement plan.
You want to know how much wealth you should retain to maintain your standard of living through a reasonable life expectancy. Then, consider transfer–ring some or all the additional wealth out of your estate. The first step in an estate plan is knowing how much you need to keep to remain financially independent.