How the For the 99.5 Percent Act Should Get All of Us to Think About Our Estate Planning

On March 25th, Senator Sanders and Senator Whitehouse presented in the Senate Budget Committee an initial draft of the “For the 99.5 Percent Act” which will have a significant impact on estate planning going forward. There are still a lot of specifics to be determined through the political process but understanding the blueprint of the Act is crucial to determining what actions to consider in 2021 before the 2022 effective date of any new estate tax legislation.

Federal Estate Tax Exemption Amount Adjustment:

Currently, the federal estate tax exemption amount is $11,700,000 per person or $23,400,000 per married couple and is adjusted each year for inflation. The proposed federal estate tax exemption would be reduced to $3,500,000 per person or $7,000,000 per married couple adjusted each year for inflation. Policy experts in Washington DC think it is more likely that the exemption will drop by 50% to $5,850,000 with any unused federal estate tax exemption remaining portable from the deceased spouse to the surviving spouse.

Federal Gift and Estate Tax Rates:

The proposed rates under the proposed Act are 45% between $3,500,000 and $10,000,000, 50% from $10,000,000 to $50,000,000, 55% from $50,000,000 to $1,000,000,000 and 65% on any amount above $1,000,000,000.

Federal Gift Tax Exemption Amount Adjustment:

Since 2011, the federal gift tax exemption has been unified with the federal estate tax exemption. The proposed Act would reduce the federal gift tax exemption to $1,000,000. Although policy experts believe that it is likely that the gift tax exemption will remain unified with the federal estate tax exemption, this development is something to watch closely in the proposed legislation.

Annual Exclusion Gift Adjustment:

The proposed Act reduces the annual exclusion from $15,000 per year (adjusted for inflation) to $10,000 per year (to be adjusted for inflation) and reduces the exemption to all restricted gifts in a year to $20,000 per year such as gifts to trusts or other gifts with limitations.

Limitations on Dynasty Trusts:

Multi-generation trusts created after the effective date of the proposed Act (currently, that date would be January 1, 2022, if legislation is passed in 2021) would only be allowed to last fifty years. Pre-existing trusts would have to be terminated fifty years after the enactment of the act.

Limitations on Irrevocable Trusts for Estate Planning Purposes that Qualify for Step up in Basis Treatment:

The proposed Act is seeking to eliminate the opportunity of creating the power to have a step-up in basis on an irrevocable trust for a beneficiary which means that there would be significant capital gain exposure on long-term trust accounts.

Estate Planning Action Steps

Make annual exclusion gifts to the beneficiaries of your estate if you have the means to do so. If outright gifts will not be effective, consider gifts in trust that can be controlled by a trusted family member.

Consider making credit-consuming gifts above the annual exclusion. Large gifts made now above the future exemption will not be clawed back (taxed again at your death) even if the federal estate tax exemption at the time of your death is less than your lifetime use of the exemption.

Develop a flexible estate plan in 2021 without mandatory trusts that have a proactive giving bent to maximize current tax benefits while they still exist.

Consider second-to-die life insurance with long-term trusts for family members (if appropriate) to maximize long-term tax-free money to the family while these opportunities still exist.

With the additional likelihood of higher income tax rates in 2022 and beyond for some taxpayers, consider Roth IRA conversions and other means to accelerate income in 2021.

Have a discussion with your Lange Legal Group attorney in 2021 to put a plan in place now that will maximize your protection against these pending law changes.

Although it is likely that the final federal estate tax act that Congress passes will be different than the “For the 99.5 Percent Act”, it is critical not to bury your head in the sand with regard to your estate plan and to act this year. Federal estate tax changes will most likely be in effect for 2022 so now is the time to contact us to revisit or to develop your estate plan and wealth transfer plan.

Fortunately, there is light at the end of the tunnel for COVID-19 but the light in the tunnel may be dimming for proactive estate planning. We look forward to hearing from you.

For more information, send an email to Matt by clicking the button below.

Jim was recently quoted in the Wall Street Journal (for the 35^th time) by Jonathan Clements, a long-respected personal finance journalist. They discussed several topics including many that Jim has included in his new book due out in summer 2015, Retire Secure: A Guide to Getting the Most out of What You’ve Got.

The article, titled: Don’t Let Obama Proposals Sidetrack Your Financial Planning, mentions several legislative proposals that have been introduced since 2014 that could have a large effect on your personal financial planning. Specifically, Jonathan asked Jim about his thoughts on the proposals and how they might change Social Security and Inherited IRAs and Roth IRAs.

Jim’s advice? Even if changes are made for allowing Social Security maximization strategies like Apply & Suspend, traditional planning advice will likely remain the same. Hold off on Social Security as long as you can and collect the full delayed retirement credits.

“Let’s say the husband dies at 70, but the wife lives to 95,” Mr. Lange says. “The extra 32% in survivor benefits could mean the difference between her being in poverty and her being just fine.”

And what about the potential death of the Stretch IRA? Does it still make sense to do a Roth IRA conversion should a law pass that limits the effectiveness of Inherited IRAs? Jim explains that if a law passes that obligates a beneficiary to drain the account in five years, such an event could push that beneficiary into the highest tax bracket for those years. Because of this:

“It might still make sense to do the Roth conversion, so the kid won’t have this horrible tax burden,” Mr. Lange says.

You can read the full article here: http://blogs.wsj.com/totalreturn/2015/03/20/dont-let-obama-proposals-sidetrack-your-financial-planning/

To learn more about nearly all of the subjects discussed in this article in greater detail, read Jim’s book! Go to www.retiresecurebook.com to receive a free 4 page summary and email reminders for the release of the Third Edition of Retire Secure!.

Save