Adapting to Change in the Legal & Tax Estate Planning Landscape

Estate planning is a crucial component of financial preparation, as it enables individuals to safeguard assets, reduce taxes, and guarantee the smooth transmission of wealth to future generations. Wills, trusts, and estate planning strategies have been substantially altered by recent modifications to tax codes, regulatory frameworks, and laws. This blog delves into the impact of these updates on estate planning and the steps that individuals can take to adjust to the changing legal and financial landscape.

1. Increased Federal Estate Tax Exemption Limits

The estate tax landscape underwent significant adjustments as a result of the Tax Cuts and Jobs Act (TCJA) of 2017, which doubled the federal estate and gift tax exemption. Individuals are permitted to exclude up to $12.92 million (and $25.84 million for married couples) from federal estate taxes as of 2023. Nevertheless, this provision is scheduled to expire in 2025, upon which the exemption amount will return to its pre-2018 level (approximately $5–6 million, adjusted for inflation).

Effect on Estate Planning:

The increased exemption presently benefits high-net-worth individuals, enabling them to transfer wealth tax-free in significant amounts.
Estate plans should consider the possibility of these provisions expiring. The higher exemption may be secured through strategies such as financing irrevocable trusts or lifetime gifting.
2. The Estate Tax Exemption’s Portability

The TCJA preserves portability, which was introduced in 2011 and enables a surviving spouse to inherit the unused portion of their deceased spouse’s federal estate tax exemption. Although this is a potent instrument, it necessitates proactive action by ensuring that IRS Form 706 is submitted in a timely manner.

Key Factors to Consider:

Portability provides married couples with the ability to transfer up to $25.84 million tax-free, providing them with flexibility.
In order to maximize their utilization of exemptions and prevent unanticipated tax liabilities, couples should collaborate with estate planning professionals.
3. Inheritance and Estate Taxes at the State Level

Many states impose their own estate or inheritance taxes with lower exemption thresholds, despite the fact that the federal estate tax applies to a relatively small percentage of estates. For example,

Estate taxes are assessed on estates that exceed $1 million in Massachusetts and Oregon.
Maryland is the sole state that imposes both estate and inheritance taxes.

Effect on Estate Planning:

Even if an estate is exempt from federal estate tax, state taxes can diminish its value.
Individuals who reside in states with low exemption thresholds may benefit from advanced planning strategies, such as changing residency to tax-favorable states or establishing circumvent trusts.
4. The Increasing Significance of Income Taxes on Estates and Trusts

The focus of recent tax policy trends has shifted from estate taxes to income taxes on estates and trusts. Estates and non-grantor trusts are subject to compressed tax brackets, with the highest federal rate of 37% reaching the threshold of $14,450 of income in 2023. Additionally, they may be subject to the Net Investment Income Tax (NIIT) of 3.8%.

Strategies to Mitigate Income Taxes:

Distribute income to beneficiaries in lower tax brackets.
Explore tax-efficient investment strategies within trusts.
Consider grantor trusts, where income is taxed to the grantor rather than the trust.
5. Protect Retirement Accounts and Act 2.0

The treatment of retirement accounts in estate planning was significantly altered by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and its 2022 update (SECURE Act 2.0).

The Stretch IRA has been abolished, necessitating that non-spouse beneficiaries exhaust their inherited IRAs and 401(k)s within a decade of the account holder’s passing, rather than delaying distributions throughout their lifetime.
Opportunities for Roth Conversion: Starting in 2024, Secure Act 2.0 includes provisions that favor Roth accounts, including the elimination of required minimum distributions (RMDs) for Roth 401(k)s and the expansion of Roth contribution options.

Effect on Estate Planning:

The 10-year rule accelerates tax liabilities for beneficiaries, necessitating proactive planning to minimize the tax burden.
Roth conversions during the account holder’s lifetime can provide tax-free growth for heirs and mitigate the impact of the 10-year rule.
6. Irrevocable Trusts and Legislative Scrutiny

Irrevocable trusts are a cornerstone of estate planning, offering asset protection, tax benefits, and control over wealth distribution. Nevertheless, they have been subjected to heightened legislative and regulatory scrutiny, particularly in relation to their utilization for tax avoidance and Medicaid planning.

Recent Developments:

States have implemented stricter regulations regarding Medicaid asset protection trusts, necessitating extended look-back periods and more rigorous examinations of transfers.
The valuation discounts utilized in family limited partnerships (FLPs) and grantor retained annuity trusts (GRATs) are being increasingly challenged by tax authorities.

Advice for Planning:

Collaborate with attorneys who have extensive experience to guarantee adherence to federal and state regulations.
Review and revise irrevocable trusts on a regular basis to accommodate evolving family circumstances and legal regulations.
7. Modifications to the Step-Up in Basis Rules

The step-up in basis is a critical tax-saving provision that adjusts the cost basis of inherited assets to their value at the time of the original owner’s demise. While proposals to eliminate or modify the step-up in basis have been proposed in recent years, no significant changes have been enacted to date.

The Reason It Matters:

The step-up in basis reduces capital gains taxes for heirs when they sell inherited assets.
It is advisable for individuals with appreciated assets to monitor legislative developments and devise strategies to protect the step-up benefit, such as retaining highly appreciated assets until their demise.
8. Estate Planning and Digital Assets

The escalating use of digital assets, including cryptocurrencies, online accounts, and intellectual property, has introduced a new level of complexity to estate planning. Fiduciaries are granted restricted access to digital accounts under recent state laws, which are founded on the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA).

Practical Procedures:

Incorporate specific provisions in wills or trusts that authorize fiduciaries to access digital assets.
Keep a current inventory of digital accounts, passwords, and instructions for successors.
9. Tax Incentives and Charitable Giving

Charitable contributions have been a favored estate planning strategy for a long time, as they provide substantial tax benefits and support meaningful causes. The number of taxpayers itemizing deductions has decreased as a result of recent changes to tax laws, such as the increased standard deductions under the TCJA. This could potentially impact charitable giving strategies.

Possibilities for Charitable Giving:

Qualified charitable distributions (QCDs) from IRAs can be utilized to make tax-free donations, thereby reducing taxable income.
Establish donor-advised funds (DAFs) or charitable remainder trusts (CRTs) to optimize tax efficiency and philanthropic impact.
Revamping Your Estate Plan to Maintain Relevance

Individuals must consistently review and revise their estate plans to guarantee that they are in accordance with their personal objectives and the ever-changing laws and tax codes. Here are some steps to remain ahead:

Work with estate planning attorneys, tax advisors, and financial planners to navigate the complexities of evolving laws. Consult with professionals.
Reevaluate objectives: Revisit your estate plan periodically to accommodate changes in family circumstances, assets, or priorities.
Employ Strategies That Are Versatile: Consider the use of instruments such as trusts, which can be adjusted to accommodate changing laws, and powers of attorney to handle unforeseen circumstances.
Remain Up-to-Date Stay informed about legislative changes that may affect estate planning, including tax reforms, regulatory updates, and new court rulings.
In conclusion,

Legislative modifications, tax reforms, and emergent trends continue to shape the estate planning, trust, and wills landscape. By comprehending these changes and proactively modifying your strategy, you can safeguard your wealth, reduce taxes, and guarantee a seamless transfer of assets to your loved ones.

Do not allow your legacy to be at risk due to outmoded estate plans or a lack of preparation. Begin the process of planning—or revising—your estate today with the assistance of experienced professionals who can help you traverse the intricacies of the contemporary financial landscape.