Are your estate documents stale? Are they still protecting you?
Estate Documents and Income Tax?
Make sure your estate documents are current. With the growing estate tax exclusion amount, this tax has been effectively repealed for about 99.8% of the country. However, there is another tax practitioners need to advise clients on: income tax. This means our strategies may need to adapt to meet our clients’ goals of avoiding or minimizing the amount of tax they pay the government.
Over the years, we have utilized irrevocable trusts, family LLCs, family partnerships, QPRTs and other techniques to minimize or eliminate estate tax for our clients. But, with the increased estate tax exemption and the potential of repeal on the horizon, now is the time to modernize those plans so that money is not needlessly wasted on income tax liability.
Consider this scenario:
Client had $1,000,000 of assets with $0.00 basis. The asset was transferred to an irrevocable trust in 1997, when the exemption amount was $600,000 and the estate tax rate was 55%. At the time, this saved Client $220,000. Over time, the assets have appreciated and today are worth $2,000,000. But, if Client died today, there would be no estate tax liability, even with the appreciation. However, by retaining the assets into an irrevocable trust as it’s currently structured, there is no step up in basis upon the death of Client. If the Trustee sells the assets today after the death of Client, the federal capital gain rate could be as high as 23.8% (20% long-term capital gain plus 3.8% net investment income), reducing the value of the assets by at least $476,000 and eliminating a significant fraction of the 20 years worth of appreciation. This doesn’t take into account state income taxes, which can be as high as 13.3%, depending on the state.
California Considers an Increase in Top Tax Rate.
Please note, several states including California are considering yet another increase to their top tax rate. Of even greater concern is that the new administration has floated several tax changes including a proposed increase of the federal capital gains rate to 43.8% on gains above $1,000,000. Further, this proposal would be retroactive to April 28, 2021.
Time to Re-evaluate Your Plan.
Bottom line: We must strategically evaluate existing irrevocable trusts, family LLCs, family partnerships, QPRTs, and other estate-tax driven strategies to ensure that they are still providing the best possible outcome for your clients. Of course, clients and their families stand to reduce taxes, but you stand to increase the assets under management and be the hero who connected them with a tax-saving solution.
I am here to assist you in modernizing your existing estate plan or developing a new plan that fully protects you and your family.
Francine D. Ward
Attorney-At-Law, Author, Speaker
Follow Francine:
Don’t miss Francine’s Latest Blogs:
- Contract MistakesContract Mistakes Contract Mistakes. No Written Agreement.Probably the number one contract mistake people make is not having written agreements with everyone they do business with. I am always amazed by […]
- 31 Days of Estate PlanningEstate Planning Blogs Estate Planning Blogs. Have you ever wished there was one location to find basic information about estate planning? One location where you could get some definitions for […]
- Trust Mill ScamsDo You Really Want to Work? Five years ago, people complained they couldn’t find work. Today, there are so many jobs available, and no one wants to work. Instead, robbers, […]
- Probate Process — Basic StepsProbate Process Probate process basic steps. When someone passes away, their estate is generally required to go through probate unless there was a valid trust in place. It is a […]
- A Few Reasons Why Asset Protection is ImportantAsset Protection is Important. Why is asset protection important? First, to protect your assets, so they get into the hands of your intended beneficiaries, and to protect the most vulnerable […]
