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What Proposed Tax Changes Mean For Your Estate Plan

Have you been wondering what the proposed tax changes will mean for your existing Estate Plan or wondering if you should have an Estate Plan in place? I'll go over some of the changes you can make to your existing estate plan or some of the mechanisms you can have in place to account for some of the changes that look like are coming our way.

Estate Tax Changes

The Federal estate tax is the tax levied on estates valued at over a certain amount on the date a person, or the surviving spouse if you are talking about a married couple, dies. The portion of the estate that exceeds the exclusion amount is taxed. We will cover how this may be impacted, below.

Current estate taxes are set at: $5.49 million or $10.98 million for a couple

Proposed estate taxes : $3.5 million from estate tax

Annual Gift Exclusion

Currently the annual gift exclusion amount is $15,000 per DONEE (person to whom the gift is paid), so a couple could gift $30,000 to each child and/or grandchild, regardless of how many children and/or grandchildren they had.

If enacted, under the proposed law’s new annual exclusion, the annual gift exclusion amount would be $10,000 per DONOR (person who is giving the gift), so a couple could gift $20,000. However, there is an additional limitation. The total annual excludable gifts are capped at double the exclusion amount. So, if a couple is gifting to their 4 children, they cannot give $20,000, combined, to each child, which would be a total of $80,000. They can only leave a total of $40,000, leaving the couple unable to leave the full exclusion amount to each child.

Once a taxable gift in excess of the annual exclusion amount is made, it counts toward the lifetime gift and estate tax exemption amount. This provision would go into effect beginning Jan. 1, 2022, if this bill is enacted in 2021. Additionally, it provides an even lower exemption still for lifetime gifts of only $1 million

Impact on Revocable Living Trusts

Revocable living trusts are still a valuable estate planning tool and I still think this is the best manner of outlining your wishes for how the bulk of your cash and physical assets are disposed of.

The revocable living trust will still take care of the following for you:

  • Splitting assets according to your wishes, percentages or certain amounts or items to specific beneficiaries

  • Crafting terms to provide for your children as you would if you were still around (educational expenses, weddings, retirement planning, etc)

  • Identifying who should manage your cash and other assets for your beneficiaries

  • No input from court regarding disposition or split of assets

  • Assets can be accessed even before death certificate is filed with court and probate case is opened

  • Probate case is quick and easy because assets in trust are not going through court

Irrevocable Trusts

The importance or function is a big change, in my opinion. I generally do not recommend irrevocable trust except in certain circumstances, such as providing for a special needs individual or for long-term care planning, but that has changed, somewhat, recently. Irrevocable trusts are a bit more important now, for those who are approaching or who are over the threshold of the new estate tax limits.

Many individuals, or couples, will now benefit from structuring their estate plans so that they have several irrevocable trusts for different purposes as well as a revocable living trust. I have recently been recommending that my clients think about adding some of the following to their estate plans:

  • Irrevocable Life Insurance Trusts

  • Trusts for Retirement Policies or Benefits

  • Spousal Lifetime Access Trusts

  • And others depending on the circumstances of the client(s)

State v

s Federal Estate Tax

Virginia does not currently have a separate estate tax or inheritance tax. Many other states do, however, have either an estate tax (a tax levied on the decedent's assets and payable by the estate), an inheritance tax (a tax levied on a person inheriting assets and paid by that person), or both. If a resident of Virginia dies owning real property in another state, some or all of the assets of the estate could be subject to an estate or inheritance tax in the state in which the real property is held.

THE TAKEAWAY here is that you want to make sure that your estate plan is working for you, not only to get your assets where you want to go, but also to get them there without paying additional taxes and fees.


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