By Lane V. Erickson, Idaho Estate Planning Attorney
Both the election, and the transfer of power between political parties in the presidency and in congress in the years 2020 and 2021 have been a wild ride! Every day, some new and amazing event occurs. However, through it all, our democracy and our form of government appears to remain solid. For that we can be thankful!
When it comes to estate planning, one of the questions that has come up regularly with my clients is that with the new president and new Congress should my clients update their estate planning. In an effort to be heard above other news stories many bloggers, journalists, and news reporters are using more and more alarming headlines about massive changes that will occur in the law that will affect estate planning. Sometimes it feels like we are in a room filled with people screaming and yelling and to be heard a person has to be louder and more alarming with what they scream and yell.
I do my best to calm my clients down and reassure them that the sky is not falling . . . yet. What I mean by this is simple. Yes, President Biden did make statements during the election that he wanted to remove many of the tax advantages put in place for the wealthy by President Trump. Taking aim at some of the tax advantages that exist through estate planning was one of the several areas of tax changes that he mentioned. It is also true that power has shifted in Congress, making it seem that President Biden can actually make the changes that he mentioned. However, and this is a big however, these changes have not happened yet.
Before any changes like this can or will occur, a bill will have to be introduced that will spell out the proposed changes. Then, that bill has to make it through both the House of Representatives and the Senate. Finally, that bill will then have to be signed into law by President Biden. In other words, this is not a process that is going to happen overnight. There will be time for everyone to read, digest, understand, and know what these changes are going to be. Once that happens, then will be the time we will be meeting with our clients and discussing the changes that could and should be made to their estate plans so that it accomplishes what they want to do.
Here are just a couple of the things that have been discussed during the election that may or may not be affected by any changes President Biden may seek.
Federal Estate TaxesThe federal estate tax, or what some people call the death tax, has to do with whether a tax will be paid on an estate when a person dies. Currently, under the changes made by President Trump, an individual can have an estate worth up to about $11.5 million dollars and pass that estate tax free to their heirs upon their death. A married couple can enjoy twice that amount. President Biden has proposed undoing this law or reducing the amount that is tax free.
If President Biden moves forward with this plan, he will have to propose the dollar amounts that this exemption would be lowered to. Additionally, he would have to propose a date when this change would occur. Because of this, our clients will have plenty of time to review the changes he is proposing and determine whether it will in fact affect their estate plan.
More than likely, an estate will still be able to be worth several million dollars and not have an estate tax imposed on it. What the actual amount will be will be determined by whatever bills are proposed.
If no proposals are made, and no changes are affected against the federal estate tax law, then the changes that were made by President Trump will remain in place under the Tax Cuts and Jobs Acts until the end of 2025. At this time, the changes made by President Trump will revert back to where they were before he made those changes. This means that whatever amount exists in the year 2025 will be reduced by half in the year 2026. Essentially this means that an individual will be able to have an estate worth about $6 million dollars that they can pass tax free. A married couple would have double that amount.
Capital Gains TaxesAnother area that has been proposed to be changed by President Biden is the capital gains laws. Some of the statements that were made during the election where that the capital gains laws would be changed in some way to allow the government to collect more capital gains taxes when a person dies.
A capital gain is simply an increase in value of an item after it is purchased. The easiest example to use to illustrate how this works is with a home. A parent will purchase a home for $50,000. Then 40 or 50 years will go by before that parent passes away. During that time, the value of the home increases dramatically. When that parent dies, the house will then be transferred to their children. The difference in value between what the parent purchased the home for, and what the home is worth when they die, is the capital gain.
Right now, the federal law states that when a parent dies, and their children inherit the home, there is a step-up in basis. In other words, no capital gains tax has to be paid, and the children get to start a new value or cost-basis for the home on the day they receive it. Then, if that child immediately sells the home, there is no capital gains tax. Alternatively, If the child holds the home for a few years and then sells it, the capital gain will be the difference between the value of the home when they inherited it and the value of the home when they sell it.
How or whether President Biden will make a change to the capital gains tax also remains to be seen. In other words, like the federal estate tax, it is impossible to know exactly what the change will be or how that will affect a person’s estate planning. Because of this, I do my best to calm my clients down and tell them that once we have something in writing we can review, then we can begin making plans on how we can protect their estate from a capital gains tax.
Using a Trust as Part of Your Estate PlanOne of the possible options that can be used to avoid federal estate or capital gains taxes has to do with using one or more trusts as part of your estate planning. There are many kinds of trusts that are available. Additionally, attorneys are always coming up with new provisions they can use in existing trusts to accomplish the things their clients want to get done.
Several decades ago, when the estate tax laws were different, trusts were very popular and were used regularly by individuals in their estate planning. However, with the changes that occurred over time in the federal tax laws, the need for many trusts disappeared. Because of this, many people were able to keep their estate planning very simple. If any of the estate tax laws are changed again, depending on what those changes are, it may be necessary to again use trusts more regularly as an estate planning tool.
If you have questions or concerns about your own estate planning, or whether a trust would be useful for you and your family, we can help. We have assisted numerous clients in the creation of their customized estate plans, including using trusts, and we are confident that we can help you too!
Enlist an Idaho Estate Planning Attorney to Help YouOur team of Idaho lawyers can help you with any of your estate planning or probate needs. Whether you are seeking to create or review an estate plan for yourself or would like to help a loved one, we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877.232.6101 or 877.232.6101 for a free consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho Estate Planning problems.