What to Expect in Estate Planning in 2021

By Anthony Lopes, Esq.

Disclaimer: The opinions expressed in this publication are those of the author. They do not necessarily purport to reflect the opinions or views of the AACR or its members.

Now that the United States has officially changed Presidents, we can start to look ahead at some of the likely changes coming from President Biden’s proposed tax agenda and other initiatives. President Biden has been clear about his intentions to decrease the Unified Credit exemption amount to either: 1) $3.5 million dollars, per individual; or, 2) the Obama-era amount of $5 million per individual (before CPI adjustments). The Unified Credit is an exemption amount which controls the fair market value amount of assets that each person is allowed to transfer by gift or bequest to other parties, during their lifetime and through their estate plan, without having to pay gift, estate, or generation-skipping transfer taxes. The Unified Credit during President Trump’s time in office was, CPI adjusted, $11,580,000 for decedents dying in calendar year 2020 (or $11,400,000 for individuals passing in 2019). This should not come as a big surprise to anyone paying attention to the Gift and Estate Tax laws over the past decade but will increase opportunities for more advanced inter vivos gift and estate planning. Additionally, this decrease in the Unified Credit could be coupled with an increased top-tier tax rate of 45 percent.

The “Biden Plan” (as some have coined President Biden’s tax agenda) might repeal the step-up in basis of a decedent’s assets and may further tax unrealized capital gains at death at the proposed increased capital gains tax rates. We must recognize the historic impact of the Biden Plan because while transfer tax rates have gone up and down, the Unified Credit amounts have never previously been decreased and prior attempts to remove the step-up in basis on a decedent’s assets have not been successful. Of course, another perspective to keep in mind is that the Unified Credit has never been anywhere near as high as President Trump’s Tax Cuts and Jobs Act made it.

Estate Tax Planning Opportunities

First, we can start our strategic estate planning by taking advantage of as many opportunities within the tax rules to make inter vivos (during our lifetime) gifts, without using up our Unified Credit amounts. The Annual Exclusion, which comes from IRC §2503(b), allows any individual to gift up to $15,000 (in 2021, which is CPI adjusted from $10,000) to any other individual (married couples can also combine their Annual Exclusion amounts to gift up to $30,000 to any individual). We can look at an example:

  • Mary and Kim are a married couple who want to reduce their taxable estate. After speaking with their attorney, Tony, they decide to gift $30,000 to their daughter Sara and another $30,000 to Sara’s husband Jim, effectively gifting $60,000 to their daughter and her husband completely (Federal) tax free.

Additionally, an individual may make Annual Exclusion gifts for up to 5 years to create a 529 Account (a specific type of college savings account) without utilizing any of their Unified Credit. Using this strategy, an individual could fund a college education account with $75,000 (remember a married couple could do this and fund the same account for $150,000), on behalf of a child or grandchild without having to use any of the Unified Credit.

A second strategy we can employ is that an individual may also pay for specific college and medical expenses directly to a third party (avoiding gift taxes). This is in addition to the Annual Exclusion (outlined above). Therefore, a married couple could pay for a child’s (or grandchild’s) college tuition directly to the college or university and make an annual gift of $30,000 directly to the child or grandchild. Over time, these relatively simple gifting strategies can help reduce the size of an individual’s taxable estate, without reducing the Unified Credit.

Other more advanced strategies include strategies like establishing irrevocable trusts, tax-advantaged trust planning, and discussions regarding strategic investments. All of these strategies depend largely on shifts in politics, tax regulations and laws, and economic shifts, however working actively with your advisor is the best way to protect your assets, estate, and family’s financial well-being.

Tony Lopes, Esq. is an attorney in the Greater Philadelphia area, and the managing partner at Lopes Law LLC. Tony counsels individuals, business owners, and entrepreneurs on matters relating to business and succession planning; estate planning and administration; buy-sell agreements; mergers and acquisitions; and, intellectual property protection.

Tony also started the Self Made Strategies Podcast to add value to entrepreneurs, by providing a knowledge base of entrepreneurial information for those entrepreneurs looking to grow.

The purpose of this web page is to provide information of a general nature only. The AACR is not engaged in rendering legal or tax advisory service. Advice from legal and tax counsel should be sought when considering these types of gifts.

Learn More about Planning Your Legacy Return to Philanthropy Brief, Spring 2021 Issue