• Bernhardt Wealth Management

Estate Tax Considerations for 2021

Updated: Mar 13

By now, it is widely recognized that the massive pandemic relief bills enacted by both the Trump and Biden administrations have added immensely to the federal budget deficit. In fact, the tax cuts put in place as part of the Tax Cuts and Jobs Act (TCJA) of 2017 may have also contributed to the deficit because of its reduction in tax revenue during the pandemic.

For all of these reasons, many observers believe that the Biden administration is likely to raise taxes as a means to help balance the budget. Expectations are also high that the greatly increased estate tax exemption enacted by the TCJA is a likely target for increased taxes. The TCJA raised the exemption from estate taxes from $5.45 million per individual to $11.58 million (over $23 million for an estate owned by a married couple). The general thinking is that estates of wealthy individuals present a more palatable target for federal efforts to raise revenue, and many believe that the Biden administration will seek to decrease the exemption, perhaps to near pre-TCJA levels.

But there is no reason for affluent individuals to cede control over the disposition of their assets to federal policymakers. Even as the outlines begin to form around the Biden tax plan, it’s not too early to formulate strategies for protecting assets from a potentially lower estate tax exemption. In addition to re-assessing your gifting strategy to reduce assets held by your estate, consider the following estate planning tools.

Irrevocable trust. By creating an irrevocable trust and transferring assets into it, you eliminate assets from your estate and, through careful design of the trust, you can arrange control and disposition of the assets according to your wishes, rather than seeing them vanish into the federal coffers.

Intentionally defective grantor trust (IDGT). Though the word “defective” in the name can seem off-putting, this versatile device allows you to segregate assets from your estate, insulating them from estate taxes at your death. Because the grantor of an IDGT retains the ability to reacquire the trust’s assets during their lifetime, they remain responsible for paying annual income taxes on any increased asset value (this is the source of the “intentionally defective” part of the name), and they may pay gift tax on transfers into the trust if any transfer amount exceeds their lifetime exemption.

Assets with a high probability for future growth (undeveloped real estate, for example) or that offer potential for a future income stream are ideal candidates for placing in the trusts. Their growth and appreciation occurs outside your estate, and upon your passing, the trust’s beneficiaries receive the value and benefits.

As fiduciary advisors, we specialize in helping our clients manage their wealth in a way that affords them maximum control and peace of mind while contributing to the achievement of their most important goals. If we can provide help or answer questions, we would appreciate the opportunity to hear from you.

Buen Camino!

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