Your initial estate plan will be based on a snapshot of your life at the time it is created. Over the years, it will invariably need revisions. There can be additions and subtractions to your family. Your marital status may change. Legislative changes can trigger the need for estate plan updates. Therefore, our recommendations might change. Any combination of these changes may put you in a very different family or financial position.

Proposed legislative changes to the tax laws deserve our attention. Right now, there are two bills making their way through Congress that would have a major impact, and we will look at them here.

Sensible Taxation and Equity Promotion (STEP) Act

Under current law, if you inherit assets that increased in value during the life of the person that left them to you (call them “grantor”), your tax cost in those inherited assets get revalued to the fair market value at the time of the grantor’s death. The assets get a stepped-up basis, or cost basis, for capital gains purposes. Again, the basis would be adjusted, or stepped-up, to the fair market value at the time of the grantor’s death. You would not be responsible for past gains on appreciation during the grantor’s lifetime. If you sell the asset for the fair market value at that time, you pay no capital gains tax. Of course, you would pay tax on any appreciation that occurred following the grantor’s death.

This is one thing for an ordinary person that is receiving a relatively modest inheritance. Now envision a stock transfer from someone like Elon Musk or Jeff Bezos. An enormous amount of generational wealth would be transferred tax-free through the stepped-up basis.

The STEP Act has been introduced to put an end to this practice. It would provide a $1 million exemption, and the rest of inherited appreciated assets would be subject to the capital gains tax at the time of death.

Right now, the long-term rate is 20 percent for people in the highest income bracket, and the White House has proposed an increase to 39.6 percent. This is something to monitor closely if you are using the stepped-up basis as part of your estate planning strategy. Some attempts are being made to create exemptions for family farms and closely-held businesses. Regardless, this law has a profound on many people.

For the 99.5 Percent Act

The other piece of legislation targets the federal estate tax and the record high exclusion. The exclusion – previously referred to as the “exemption” – is the amount that can be transferred before the tax would become applicable.

In 2011, a $5 million exclusion was established, and it remained in place indexed for inflation through 2017. At the end of that year, the Tax Cuts and Jobs Act doubled the existing $5.49 million exclusion. Another inflation adjustment was added to establish an $11.18 million figure.

There have been additional adjustments since then. This year, the exclusion is $11.7 million. The 99.5 Percent Act that has been introduced by Senator Bernie Sanders of Vermont would reduce the exclusion to $3.5 million.

At the present time, the maximum tax rate is 40 percent. The Sanders bill would raise the rate to 45 percent for estates that are valued at $10 million or less. The rate would then go up gradually until it tops out at 65 percent for estates that are worth more than $1 billion.

We have a gift tax in the United States that is unified with the estate tax, so the exclusion is a unified estate and gift tax exclusion. This means the exclusion takes into account gifts that you make during your life plus the estate that will be transferred after your death.

Right now, you could give $11.7 million in tax-free gifts during your lifetime if you choose to do so. Under a provision contained within this measure, lifetime gift-giving would be limited to just $1 million.

There will be a great deal of resistance from legislators that believe in keeping taxes and tax rates low. Therefore, these proposals may never become reality. Even if there is no new legislation enacted, there is going to be a reduction in the exclusion on January 1, 2026.

At that time, the provision contained within the Tax Cuts and Jobs Act that increased the exclusion is going to expire or sunset. The exclusion is scheduled to go down to the $5.49 million that was in place in 2017.

Because of this pending change, if you are impacted by the estate tax, you should consider lifetime gift-giving between now and then to take advantage of the high exclusion.

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We have been conducting webinars on an ongoing basis to provide learning opportunities to members of our community. You can come away with a great deal of useful information if you join us, and there is no charge, so this is a great way to invest some spare time.

You can see the dates if you visit our Oklahoma City estate planning webinar page. When you identify the session you would like to attend, follow the simple instructions to register so we can reserve your spot.