What is Happening to U.S. Estate Tax Laws in 2021?

How to defend yourself against changing tax legislation. 

There are significant potential tax changes on the horizon for investors with wealth in the United States. In this article, we will cover what these potential tax changes look like and how you can work with us to combat the ever-changing tax laws. 

What is Estate Tax? 

Before we jump into how the Biden presidency can potentially shift estate and gift taxes, let’s cover the taxes that are being affected. An investor spends their life growing their wealth through work and investments. Since they want to pass this wealth down to their family, they create an estate plan to determine how their assets will be distributed when they eventually pass away. When being distributed, the wealth being inherited will be subject to state and inheritance taxes, depending on where the assets are being held and how much value the assets have. These taxes typically apply to high net worth individuals. Many investors create an estate plan which considers these taxes when deciding where to hold these assets. Fortunately, many don’t have to face estate taxes as there is a current federal estate exemption of $11.58 million. After that, the current federal estate rate is 40%, but the tax rate and the lifetime exemption are at risk of changing, as you will see below. On top of federal taxes, there are some states that have an extra estate tax. The exemptions for these states are less than half of the federal rate. Some are even as low as $1 million. Creating an estate plan that considers these taxes can lower your tax responsibility significantly. Next, we will explore some of the potential changes that are making investors rethink their estate plan. 

How Estate Taxes may be Changing

During the 2020 election, Joe Biden’s team introduced potential changes that many investors are beginning to plan for now that he has been elected. The biggest areas that could experience these changes are estate and gift taxes. One of the changes affects the lifetime gift tax exemption, which is the amount of money an individual can give away during their entire life without paying gift taxes on the transfer to the person receiving the gift. This exemption is unified with the federal estate tax exemption amount. This means they are the same amount. Before 2018, the lifetime exemption was $5.5 million per person, but the amount was temporarily increased by the Tax Cuts and Job Acts of 2017 (TCJA). Donald Trump signed this act into law while he was president, which increased this figure to $11.58 million per person, which went into effect on the first day of 2018. Initially, this temporary increase was supposed to last through 2025, but many are preparing for the Biden administration to revert to the pre-2018 amount before that. Many are saying the number could potentially be decreased as far as $3.5 million per person. 

There are also potential changes to the federal estate tax rate, which is the amount of tax it costs to transfer wealth during a person’s life or after their death. This is the rate that is imposed on the amount exceeding the exempt amount discussed above. Currently, this rate is 40% and has been this easy since 2013. Biden has plans to change the rate to “historical norms” which sits around 45%-50%, but there have been speculations this rate could reach as high as 70%. Another potential change is getting rid of the step-up in basis, which is an adjustment to the cost basis of an asset to its fair market value at the time of the investor’s passing. Many have used a technique of holding an appreciated asset and waiting for a step-up in basis in their estate planning for years. President Biden has proposed getting rid of the step-up in basis for inherited assets completely. 

While it is unclear if these changes are to take place, don’t get too comfortable. It is essential to do your best to plan ahead. How can you plan ahead if you aren’t unsure of what the future holds? There are many tax planning techniques that can stand the test of time. Read below to find out how Alpen Partners can create a plan with you for the future. 

Save on U.S. taxes with Alpen Partners.

To protect from heightening estate and gift taxes and secure yourself from everchanging tax legislation, many wealthy investors with a significant amount of assets in the U.S. are utilizing structures, such as trusts, to secure their wealth for generations to come. There are a ton of benefits to opening a trust in the United States. A trust can be utilized to combat any adverse taxation and lower some taxes like estate tax. If a U.S. resident is looking for asset protection, it is advised the investor seek offshore options, some that favor the creditor less. You can legally transfer assets out of reach of future creditors and put them in an impenetrable place and save significant amounts on estate and inheritance taxes. With a trust, individuals take assets out of their name and place them into a trust that heightens their investments’ safety.  Additionally, a trust can ensure your assets are properly distributed when you pass away. 

For more information on U.S. trusts and how you can set one up, read here.

Trusts are just one way wealthy investors are ensuring they are getting the most from their wealth and protection from potential tax changes and offer strong asset protection. Don’t lose what you have worked hard for. You can work with Alpen Partners to examine your current estate plan and determine if it is protected against these changes. If you don’t have an estate plan, our team is prepared to create one with you. We are ready to help you at any level of financial planning.