Recently, Presidential Candidate Kamala Harris proposed a plan to lower housing costs that would be funded primarily with significant changes to the estate tax law and increase the corporate tax rate from 21% to 28%. Harris is calling for creating a $40 billion fund for her housing program.
Among the proposed changes discussed below is to lower the estate exemption to $3.5 million and increase the estate tax rate to as high as 65%.
Back in 2018, the tax law changed to double the gift, estate and generation skipping exemption to $11.18 million from $5.6 million. Adjusted for inflation, the current exemption is $13.61 million. While the change provided a major opportunity to pass on a substantial amount of wealth tax-free, there is a catch: It is a limited time offer. This increase in the estate tax exemption is set to sunset at the end of 2025, meaning the exemption is scheduled to be cut in half to between $7.0 million to $7.5 million. Now Harris is proposing to further reduce the exemption to $3.5 million.
Currently just 0.2% of U.S. adults are subject to the Federal estate tax according to IRS data. There were 2,570 taxable estate tax returns filed in 2019 collecting $13.2 billion. The Tax Policy Center estimates that just over 7,100 estate tax returns will be filed for people who died in 2023, of which about 4,000 will be taxable. The percentage of U.S. adults subject to the estate tax remains in the 0.2% range.
Today a married couple could pass up to $27.22 million without a Federal estate tax. Under the sunset provision of the 2018 tax law, a married couple could pass about $14 million on to their family without estate tax in 2026 and after. Under Harris’ proposal the amount a married couple could pass to their family without estate tax would be reduced to $7 million.
The number of individuals who would be subject to the Federal estate tax with a $3.5 million exemption would significantly increase. It could be you.
These are the proposed changes that would apply to estates:
- Increasing the estate tax rate to 55%, 60% and 65% (from the current 40%).
- Reduce the gift, estate and GST exemption to $3.5 million.
- Limit the annual exclusion to $10,000 per donor with any overall cap if $20,000 per donor
- Implement a 10% surtax on estates over $1 billion.
- Require GRATs to have a 10-year life and a remainder interest equal or greater than 10%.
- The deemed owner of grantor trust assets would include those assets in their gross estate; any distribution to a beneficiary during the term of the deemed owner would be treated as a gift and if a grantor trust is turned off and it becomes a non-grantor trust during the deemed owner’s lifetime would be treated as a gift. Existing grantor trusts would be grandfathered.
- Impose the generation skipping transfer tax on transfers to a family member not born as of the date the trust was formed.
- Limit valuation discounts on the transfer of non-business assets.
- A new income tax surcharge on high-income estates and trusts, consisting of a 5% tax on the portion of the modified adjusted gross income (MAGI) that exceeds $200,000, and an additional 3% tax on the portion that exceeds $500,000.
What Should You Do?
The estate planning process starts with understanding your objectives, and those of your family. It considers a wide range of issues and what-ifs, questions that require self-examination, research, and input from a variety of sources.
There are many issues to consider in designing an estate plan that will transfer your assets. What is the most tax-advantaged way for you and your beneficiaries to transfer your assets? What is included in your will and who are the beneficiaries? Who is replacing you to govern your assets? Who is your trustee, and who would be the successor trustee if the first doesn’t survive you? What is the duration of your trust and what are the instructions for when that trust expires?
Tax planning to mitigate the impact of increases in estate taxes could include:
- Consider making gifts to family members before 2026 taking advantage of the large exemptions before it may be reduced in 2026 or before.
- If you are a business owner, consider gifting ownership in the business before 2026 with possible discounts to value for lack of control and marketability.
- If you are starting a new business, consider having children or grandchildren as part of owners at the time the business is formed.
- Consider making gifts in trust, possibly multi-generational trusts. There are many types of trusts to consider depending on your personal and family circumstances, including SLATs, GRATs, BDITs, QPRTs, CRTs, CLTs and more.
- Consider adopting grantor trusts whereby the grantor pays the income tax on the trust income, allowing the trust assets to grow unimpaired by income taxes.
- Consider more aggressive funding of 529 education plans for children and grandchildren.
- Consider if you should own more life insurance coverage and evaluate any existing life insurance policies owned.
- If you own life insurance in a trust now, consider gifting enough in the trust to fund future premiums without having to make additional gifts to the trust in the future.
- Consider charitable planning in your estate plan.
- Consider if it makes sense to pay gift taxes now.
The proposed effective date is after the date of enactment. Normally tax legislation passed in the initial year of a new administration occurs in the fall. However, it is possible for changes to the tax law to be effective retroactively to the first day of the year the legislation passes. In the initial year of a new administration we have not seen such sweeping tax law changes being retroactive to the beginning of the year, however it is legally possible.
We have just over 16 months before January 1, 2026. However, if these proposals do become the law of the land and are effective January 1, 2025, we only have 4 months to plan.
Let’s get together to evaluate your estate plan and the implications of increased estate tax and how to mitigate the impending storm of increased taxes. We can help.
Additional Sources: https://www.wealthmanagement.com/high-net-worth/american-housing-and-economic-mobility-act-2024-explained
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