Federal tax law changes affecting wealthy individuals and families may become a reality. While the substance and timing of these modifications is uncertain, the major proposals being considered would significantly change the tax planning landscape including how certain Americans will approach financial and estate planning.
Before we consider estate planning under the new 2021 tax law, let’s take a look what estate planning is.
What is Estate Planning?
Though common, not everyone knows what the term estate planning is. And this is because a huge percentage of people don’t see the importance in planning an estate. Estate planning is simply a plan an individual makes while alive for the management, distribution, and or disposal of their assets during their lifetime of after their demise.
Types of assets that can comprise of an individual estate include real properties (like buildings and lands), intellectual properties, cars, insurance, shares and stocks, banks accounts, including other personal properties.
It is very important that you contact an estate planning attorney Long Island and plan your estate as failure to do so may not necessarily affect you, but your family and those you care about. And this is because when you kick the bucket and you do so without a will, your assets will be shared based on the intestate laws of your state.
What will happen if you fail to plan you estate?
Failure to plan your estate can be very terrible. The effect it’ll have on your loved one may last for a while. That is why you see most wealthy individuals ensuing that they plan their estate in time because no one knows when he or she could kick the bucket.
If you fail to plan your estate, the following may occur:
- Your loved ones may a little portion of your estate. Or in the worst case scenario, they may not get anything.
- All that you have worked for will be shared based on the intestate law of your sate. That is, the government of your state will dictate how your estate is to be shared or distributed.
- Your estate will likely enter probate which is a very challenging process that could cost your family and loved ones lots of money and time.
- If you becomes incapacitated, you won’t have a say over who will cater to your medical, and financial needs.
Estate planning law under the new 2021 Tax Law
Increase the Federal Estate Tax
Who may be affected? Taxpayers with assets over 43.5 million
Tax Proposals
Under the recent rules for 2021, you can transfer up to $11.7 million during your lifetime or at death without paying gift or estate tax. In addition, you can transfer up to that same amount to grandchildren or lower generations, outright or in trust, without incurring generation-skipping transfer (GST) tax.
The $11.7 million amount is a record high amount, and it is already scheduled to cut in half in 2026 (after adjustment for inflation). The new tax proposals would cut the exemption even further and sooner.
Starting in 2022, the exemption would come down to $3.5 million for transfers at death and only $1 million for gifts you make during your lifetime. The GST exemption will also come down to $3.5 million.
At the same, the proposals would raise the tax rates for gifts, estates including generation-skipping transfers made above the exemption amount to as high as 65% from the current flat rate of 40%.
Actions to consider
These potential modifications put a limelight on gifting now to use your exemption amount before you lose it. Depending on your situation, gifting may or may not be suitable. Some taxpayers may go as far as making gifts above the exemption to settle tax at current rates. For others, a close inspection at your situation may show that gifting isn’t suitable even if the law changes.
Running the numbers under the potential new law may also highlight liquidity concerns following your death that you may not have thought of with the current high exemption amounts.
Contact our estate planning attorney if you wish to plan your estate or if you have questions regarding estate planning under the new tax law.
