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ESTATE PLANNING IN LIGHT OF IMPENDING TAX REFORM



There are a number of proposed changes to the federal and New York estate and gift tax laws that, if passed, could have enormous implications for high-net worth individuals. Accordingly, these individuals should consider taking immediate action during this limited window of opportunity with respect to their estate planning, in order to maximize the value of assets ultimately passing to their beneficiaries.


Proposed Federal Changes


Some of these proposed legislative changes include reducing the federal estate, gift and generation-skipping transfer tax exemption from $11.7 million to somewhere between $3.5 million to $5 million. It is important to note that any such reduction in the exemption could be retroactive to January 1, 2021, which would complicate planning and could lead to unintended tax consequences. Accordingly, individuals should consider using all or a portion of their $11.7 million exemption as soon as possible, while carefully structuring any such planning to avoid federal gift tax in the event that the reduction in the exemption is made retroactive. It has also been proposed that federal estate tax rates might be increased from the current 40% rate up to as much as 77% on extremely large estates, and that the gift tax exemption be limited to $1 million.


Other proposed changes which can have a significant impact on estate and gift tax planning includes:


1. Elimination of certain discounting techniques commonly used in connection with many effective estate tax planning tools;

2. Adverse changes in the taxation of grantor trusts to make them includible in the grantor’s estate for estate tax purposes;

3. Curtailing the benefit of generation-skipping transfer tax exemption, such that estate tax will be payable after a specific term of years;

4. Capping the total amount of the annual exclusion that individuals can currently use to make tax-free gifts to others each year;

5. Elimination of the step-up in basis at death for income tax purposes, such that there would instead be a carryover basis or recognition of capital gains at death.


Proposed New York Changes


Bills were recently introduced that would impose new state inheritance and gift taxes on high-net worth New Yorkers in an attempt to address the state’s severe budget shortfall.

Under current law, New York has a state estate tax with a basic exclusion amount of $5,930,000 for 2021. The maximum New York state estate tax rate is 16 percent. There is currently no New York state inheritance tax or gift income tax.


There are two proposed estate tax changes that could be effective on April 1, 2021 for New York residents who die on or after that date. One bill would increase the top marginal estate tax rate for New York taxable estates over $10.1 million from 16% to 20%. The second bill would increase the marginal estate tax rate for New York taxable estates by 2% for every marginal New York State estate tax bracket, such that the top New York state estate tax rate would increase from 16% to 18% for New York taxable estates over $10.1 million.


Additional proposed bills would tax inheritances of $250,000 or more, with certain exclusions, including retirement and pension funds. The tax rates would be graduated, with inheritances between $250,000 and $500,000 being taxed at 5%, and amounts exceeding $10 million being taxed at a rate of 50%. This new inheritance tax would impose the highest inheritance tax rate in the nation, dwarfing other states that currently have such a tax.


In addition, a new proposed gift income tax would exempt up to $50,000 of gift income from tax. Between $50,000 and $100,000 in gift income would be taxed at 5%, and amounts exceeding $2,000,000 would be taxed at a rate of 50%.


Please contact us at info@laramsass.com to discuss how you may take advantage of advanced estate tax planning techniques, while they are still available.



DISCLAIMER: We provide the information in this article for general information purposes only, and these materials do not constitute legal or other professional advice. We do not accept any responsibility for any loss that may arise from reliance on the information contained herein. No reader should act or refrain from acting based on information contained in this article without seeking advice of counsel.

The information contained on this website is provided for informational purposes only and should not be construed as legal advice on any subject matter.  If you wish to discuss the topics addressed on this website, or other estate planning issues, please contact Lara Sass & Associates, PLLC.
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