Now that the elections are over, estate planners and individuals alike are curious about possible changes coming to the inheritance laws in the next few years.
Staying abreast of the changes to estate and inheritance laws is an important aspect of being a Certified Financial Planner® and Wealth Manager. We make it our business to stay ahead of policy changes that could impact estate planning for clients. Learn more about possible post-election estate planning changes.
Current Estate Laws
The current estate laws include an exemption from federal estate and gift taxes equal to $11,580,000 in assets. If that amount is exceeded, the additional assets are taxed at a federal rate of 40%.
The amount of income tax paid depends on the fair market value of the assets on the date of the individual’s death.
Future Inheritance Changes
Even without any new legislation, the current estate and gift tax exemption of $11,580,000 is scheduled to decrease on January 1, 2026 to $5,000,000.
The exemption could be decreased as soon as 2021 if included in a new tax reform bill. The current laws provide for a separate generation-skipping transfer (GST) tax exemption of $11,580,000. The GST tax exemption historically mirrors that of the estate and gift tax exemption.
Carry Over Benefit Changes
There are two possible scenarios that should be considered. Today, beneficiaries inherit assets on a carryover basis.
However, another scenario has been proposed in tax reforms. This includes a realization of capital gains upon death. That could result in capital gains and estate taxes levied on the same assets.
Grantor Retained Annuity Trusts
Grantor retained annuity trusts, or GRATs, could be a useful estate planning strategy with the low interest rates we have currently. The transferor, or grantor, retains an annuity for the life of the trust, and any assets remaining at the end of the trust term pass on to other beneficiaries. This means that the inheritance could be received in two years.
A GRAT has the potential for a large tax-free gift to the beneficiaries if the assets appreciate.
However, over the past few years legislation has been introduced that would limit the appeal of GRATs, including requiring a minimum term of 10 years. There may also be impacts to retained interest that could also produce a gift equal to the greater of 25% of the trust assets or $500,000.
A like-kind exchange allows taxpayers to avoid paying capital gains taxes on the sale of real property if the taxpayer invests the sales proceeds into a replacement property that is valued the same as or greater than the original property within 180 days of the original sale. This could be another strategy to implement if estate law changes are implemented.
Questions on Post-Election Estate Planning Changes in Northern Virginia?
We recommend speaking to a professional to go over your unique needs and decide on a plan of action for a proactive strategy for your estate planning changes in Northern Virginia. To get started, contact Argent Bridge Advisors online or call (833) 568-4900 today to meet with one of our experienced financial advisors.