TPC Newsletter November 2021
2021 End of Year Tax Planning
In two months, 2021 will only exist in our memories, but we still don’t know what the tax laws will be for 2022. As I write this, Democrats are frantically deciding how to pare down parts of their proposed tax plan intended to promote greater social spending as they seek to satisfy demands from within their own party to cut the size of the package. Republicans, on the other hand, are opposed to most parts of the plan, so unless the Democrats can unite, the plan will fail. It seems that not everything is achievable in one year, which is definitely a relief for most of us.

Congressional and White House sources say that among the ideas now being removed from the plan are a $109 billion plan to provide free community college to all Americans and a $150 billion program to push utilities to switch to renewable energy. The child tax credit extension has been reduced to one year, and paid family leave could be reduced to 4 weeks from the proposed 12. Additionally, and quite significantly, a fundamental mechanism for paying for it all by raising the corporate and individual tax rates may not come to pass, or at least not at the levels previously proposed.

A new proposal just released by the White House proposes a “wealth tax” on people with assets exceeding $1 billion. In a recent interview with CNN, House Speaker Nancy Pelosi estimated that the new tax could raise as much as $250 billion in additional tax revenue. However, this is not even close to covering the nearly $2 trillion in proposed additional spending to occur over the next 10 years, now down from the initially proposed $3.5 trillion spending plan. But, what does this mean for the rest of us? You can find out more by viewing this article in its entirety on our website, here. Most of us won’t have to worry about the “wealth tax” which will only affect .0005% of Americans (or about 700 people). Most Americans are concerned with income tax rates and, although in a smaller number, estate taxes.

Income tax rates have fluctuated throughout history and will continue to fluctuate. But there are consequences to raising income taxes, whether at the individual or corporate levels. Economists point out that income taxes reduce incentives to work (or encourage early retirement), corporate taxes reduce incentives to invest, and progressive tax rates decrease incentives to invest in one’s own skills. These are costs that must be considered.

Since I began working with estates and trusts, estate taxes have been a major part of every administration’s tax plan. In 1997, the combined estate/gift tax exemption was only $600,000 per person, but if you failed to plan, married couples could unknowingly lose the exemption of the first spouse to die by having everything pass to the surviving spouse. Beginning in 1998, the exemption began to inch up $25,000 per year until being increased to $1 million under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Under EGTRRA, the estate tax exemption rose from $675,000 (2000) to $3.5 million (2009), and the rate fell from 55% to 45%. In 2010, the estate tax was to be eliminated and replaced with a modified carry0ver basis scheme that would, in effect, do away with the step-up in basis at death. However, the law had a sunset provision built in which would return the numbers to 2001 levels in 2011.

Many of you remember the panic felt at the tail end of 2009 and into 2010 that the exemption would return to $1 million (with a 55% tax rate). But it didn’t, instead being increased to $5 million (with a 35% tax rate) as a compromise between Senate Democratic leaders (who wanted to retain the 2009 figures) and Senate Republican leaders who wanted them increased. However, this was only adopted for a two-year period, through 2012. This law also included a new idea of allowing spouses to inherit the unused exemption of a deceased spouse (referred to as the Deceased Spouse’s Unused Exclusion (DSUE) or the concept of “portability”).

Unfortunately, the sunset provision in the 2010 law created another panic toward the end of 2012. But at the end of 2012, the rules were made permanent (for the time being), leaving us with a $5 million lifetime gift/estate exemption (indexed for inflation) and a 40% tax rate for assets exceeding the exemption amount.

The 2017 Tax Cuts and Jobs Act (TCJA) made additional changes to the tax laws by significantly raising the threshold for the imposition of income, estate, and gift taxes. However, many of the TCJA provisions will expire at the end of 2025. A consistent tenant of the Biden plan has been to terminate the TCJA changes this year. As debates continue regarding whether the TCJA favors more affluent taxpayers or was (and still is) necessary to stimulate economic growth, the only thing we know for sure is that change is coming… soon!

One new tenant of the Biden plan is a proposal to tax capital gains when transferred by either gift or at death. Currently, these gains escape capital gains taxes upon transfer. The Build Back Better Act proposes other changes in the estate and gift tax laws which would return the estate tax exemption to $5 million indexed for inflation (which would be approximately $6.2 million in 2022), limit the lifetime gift exemption to only $1 million, and make other changes such as limiting certain valuation discounts and targeting the grantor trust rules which would effectively shut down a number of popular estate tax planning techniques, including irrevocable life insurance trusts (ILITs), spousal lifetime access trusts (SLATs), grantor retained annuity trusts (GRATs) and Qualified Personal Residence Trusts (QPRTs).

Remember, taxes imposed on the transfer of wealth is a tax on after-tax dollars. The gift and estate tax structure is a combined structure so that you are taxed on the transfer of wealth whether made by gifts during lifetime or transfers at death. Tax is owed on the amount transferred which exceeds the exemption in effect on the date of the transfer. Estate taxes are not currently a concern of most Americans because most do not have estates which exceed $11.7 million (the current exemption amount). However, the significant limitations proposed will make this a concern for a larger number of the population. There are many ways to use your available exemption now, before the rules change, but time is swiftly running out. If you use your exemption now, and the exemption is lower at the time of your death, the value of the prior gifts cannot be pulled back into your estate to create a taxable estate. Under the current rules, there is no “clawback” of exemption used now, even if what you transfer now is greater than the transfer tax exemption available under the law at your date of death. Thus, individuals with estates that exceed the projected exemption amount of $6 million should consider using up their available exemption this year.

Unless you are able and willing to use up at least $6 million now, however, and depending on your age, you may not realize any benefit. This is because the laws will likely change again, perhaps even many times, before you die. But for many, a greater concern is the changes to the grantor trust rules which will shut down various currently-available techniques to “leverage” your exemption and pass a greater amount at a lower cost. If you have any interest in exploring opportunities which may exist through ILITs, SLATs, GRATs, and QPRTs, please call. We have limited space available to accomplish such complicated planning before the end of the year. Remember, actions taken to plan now will be grandfathered!
Have You Planned Your Thanksgiving Menu Yet?

It is hard to believe that thanksgiving is right around the corner! When it comes to side dishes every family has their list of favorites. This month our recipe features a classic staple, a yummy mac and cheese. Make this recipe your own by mixing different cheeses or adding toasted breadcrumbs or crushed ritz crackers on top!
Word Cookies
There’s a reason why experts say you should treat the brain like you would the rest of your body. If you want to keep your mind sharp as a tack in your later years, you’ve got to exercise it. Word games are a convenient way to test your vocabulary and challenge your puzzle-solving skills. This month our game feature is called Word Cookies. You can find this game in the Apple or Android app store on your smart phone or tablet. In this game you are shown a series of letters on a cookie sheet and you must make a word from them by connecting the letters. Challenge your friends while exercising your brain!

In Case You Missed It Last Month


We touched on the subject of tax law changes in our last newsletter. With a new administration often comes changes in the tax laws, and it is no secret that the Biden administration intends to make sweeping changes which, if passed, will increase taxes – income, estate, gift and generation-skipping transfer taxes – across the board. Most of the changes are targeted toward early termination of the 2017 Tax Cuts and Jobs Act (TCJA) which significantly raised the threshold for the imposition of income, estate, and gift taxes for individuals and entities. But that’s not all. Also on the chopping block are several estate tax planning strategies and the imposition of an entirely new concept of taxing unrealized gain at death. Click here to view what you missed.

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Sincerely,
Helena S. Mock, Esq.

THE PENINSULA CENTER
FOR ESTATE AND LIFELONG PLANNING 
461 McLaws Circle, Suite 2
Williamsburg, VA 23185 
Phone: 757-969-1900