The incoming Biden administration has pledged to change Trump-era tax laws. And while we’ll have to wait for the outcome of the Senate races in Georgia on January 5 to know what a Biden administration could get through Congress, many high-earners and people with sizable estates are taking steps to protect their assets before the clock runs out on 2020.
But first, what’s with the 67% estate tax?
The 67% number comes from a potential combination of taxes on capital gains and estates. For the heirs of earners between $400k and $1 million, Biden is proposing new legislation that would place a tax 20% tax on unrealized capital gains, as well as a 3.8% Net Income Investment Tax (NIIT).
The remainder would then be taxed like ordinary income—but that’s changing too.
The Biden team hopes to return to estate tax numbers from 2009, bringing the threshold for a taxable estate from $11.5 million back down to $3.5 million and returning the tax rate from 40% to 45%.
So, if the deceased had $100 million in capital gains, $67 million would go to taxes and $33 million could be passed on to heirs. That’s why so many folks are taking legal steps to protect their assets at current rates before the end of 2020.
Here’s a top countdown of options to consider as 2021 approaches.
5. Create a Spousal Limited Access Trust (SLAT)
Of everything mentioned above, the greatest potential change in 2021 is the shift in estate and gift tax exemption from $11.5 million to $3.5 million. To sidestep this issue, consider passing on assets today.
In a spousal limited access trust, one spouse creates a trust for the other. They can designate additional beneficiaries, such as kids or grandkids. In doing so, the amount of wealth transferred is then removed from the donor’s taxable estate.
The catch? Actually, there are two. First, only use a SLAT if you’re in a very stable marriage. SLAT is a common process but it’s designed to be irrevocable. Second, it’s possible for each spouse to create a SLAT for the other, so long as they’re different. If the trusts are the same, the IRS can use reciprocal trust doctrine to “uncross” them, re-opening assets to taxation.
4. Sell to an Intentionally Defective Grantor Trust (IDGT)
To lighten your estate tax load, you can sell some or all of your business to an intentionally defective grantor trust. The trust now owns the business, but the grantor (you) can retain control of the trust.
That control earns you the pleasure of continuing to pay income tax on the trust’s assets. But it also means that when the time comes, the trust (and the portion of the business it owns) gets passed on to beneficiaries without the burden of an estate tax.
3. Make the most of charitable contributions
Plan your giving to support a cause you care about and reduce your tax liability.
A charitable remainder trust lets a grantor donate to one or more charities—and receive the associated income tax deduction—but continue to earn income on the donated amount during their lifetime. Donated funds aren’t subject to estate tax, and the grantor receives the tax deduction in the year they make the donation.
2. Plan a 529 for kids
A 529 college savings plan sets kids up for college and reduces your capital gains and estate taxes.
Each donor has a cap of $15k per child per year. Though donations to a 529 aren’t tax deductible, earnings are tax-free, so long as they’re used for post-secondary education expenses.
And there’s a loophole: A donor can make five years’ worth of donations at once. However, they can’t donate for the next four years. This means that a married couple can set aside $150k tax-free for their kid’s future today. Or grandkids, a favorite niece, etc. You get the picture.
1. Talk with an estate planning attorney
As you read through and consider which options might be the best fit for you, seek guidance from an attorney who knows the ins and outs of estate and trust planning—and who will listen to the specific details and complexities of your current situation.
To learn more, contact us to schedule a consultation. Our experienced Texas estate planning attorneys can guide you through the process.