Davis Wright Tremaine LLP’s estate planning team provides advice on a regular basis to notify our clients, their advisors, and our friends of important legislative changes and other matters of interest. There were many different tax proposals in the 2020 presidential campaign, and by now you’ve probably been reporting in the media about possible changes to tax law at the federal and state levels. Here we offer a number of proposed amendments and pending laws that could affect your estate planning from state to federal, as well as some strategies to mitigate impending increased tax burdens.
Exceptions to the inheritance
Recall that the increase in tax exemptions for gift, inheritance, and generational transfer (GST) transfers by $ 5.4 million to $ 11.7 million, which began with the passage of the Tax Reduction and Jobs Act of 2017, End of 2025 with a reversal of the $ 5 million per person exemptions made before the law, adjusted for inflation.
While we can’t predict exactly what tax changes the Biden administration and Congress will propose, it is likely that the proposals will include a reduction in tax exemptions for carryover before 2026 as part of a tax package designed to fund the recently passed COVID-19 Aid laws and other federal spending are required.
In fact, Senator Bernie Sanders published his own tax proposal on March 25, 2021. It includes a reduction in federal estate tax exemption from $ 11.7 million to $ 3.5 million, a reduction in federal gift tax exemption from $ 11.7 million to $ 1 million, and a significant one Increase in marginal tax rates for federal gift and estate tax. The bill would come into force on January 1, 2022 if passed in 2021.
Given the possibility of reduced transfer tax exemptions, this may be a good time to consider options regarding using some or all of an individual’s transfer tax exemptions before such reductions. Some popular strategies are:
- (A) Outright gifts and gifts with confidence: Strategies such as lifetime direct gifts, gifts to dynasty trusts (or GST trusts), spouse lifetime access trusts (SLATs), and qualified personal residence trusts (QPRTs) are particularly effective ways of using such exemptions.
- (B) Gifts to benefit from historically low interest rates: These strategies include the use of GRATs (Grantor Retained Annuity Trusts) and CLTs (Charitable Lead Trusts). Recently there have been legislative proposals that would reduce the effectiveness of GRAT.
- (C) Transfer of minority interests to related companies: Such transfers typically include consideration of rebates for lack of control and marketability. The availability of such discounts in the future could be limited by potential legislation.
While there is no clarity as to when such potential transfer tax legislation will come into effect, there has been speculation about the possibility of retroactive tax legislation. We are closely monitoring the possibility.
While retrospective legislation is possible, the current composition and rules of the U.S. Senate can make it difficult to pass. There are a few strategies that can be used to attempt to reduce the possibility of retroactive federal tax law that could be discussed with your trust and estate attorney.
Washington Estate and Capital Gains Tax
In Washington, a bill was passed in the State House that would have increased the highest state estate tax rates. This bill didn’t make it off the committee.
Washington legislature passed a capital gains tax bill. The governor has stated that he plans to incorporate the capital gains tax law into the law. However, when successful, it can face both legal and proactive challenges. The effective date of pending capital gains tax in Washington is January 1, 2022.
Oregon Estate and Income Taxes
Oregon continues to levy its own estate tax, but proposals to increase the amount of tax exemption have not gained momentum. To that end, the transfer tax planning for federal transfer tax purposes will continue to result in significant savings on estate tax in Oregon.
In addition to transfer tax planning, Oregon income tax considerations continue to dictate planning. The city of Portland and Multnomah Counties have introduced new income taxes effective January 1, 2021. These include the tax on supportive housing services (upper limit of 1 percent) and pre-school for all taxes (upper limit of 3 percent).
Effective January 1, 2022, the state will levy an additional income tax, the Paid Family Medical Leave Tax.
California “Property” and Property Taxes
There are renewed attempts in California to impose a “wealth tax” on qualified high net worth residents after the failure of 2020 legislation that would have subject California residents, part-year residents, and those who spend more than 60 days in California to a tax of 0.4 percent of net worth greater than $ 30 million.
On March 15, 2021, new legislation was introduced that would impose an annual tax of 1 percent on net household wealth in excess of US $ 50 million and an additional 0.5 percent on household wealth in excess of US 1 billion -Dollars.
A two-thirds vote from both houses of the California legislature would be required to get the proposal into the 2022 state vote, and a simple majority of the state’s electorate would then have to approve it. Much like Washington state’s Capital Gains Tax Act, California’s wealth tax would likely face major legal challenges if passed.
So far, there has been no further move towards a state estate tax in California in 2021. A bill proposed in 2019 (Senate Act 378) would have imposed estate tax on land worth $ 3.5 million ($ 7 million for a married couple) or higher. The bill never found enough support in the legislature to get into the November 2020 vote, where it would have required a majority of California voters to go into law.
Regarding California property taxes, Proposition 19, which was approved by voters last November, severely limited a parent’s ability to transfer California property to a child while maintaining the existing property tax base. The new law applies to all transfers made after February 15, 2021.
Senate Bill 668, introduced on February 19, 2021, aims to postpone the entry into force of the provisions of Proposal 19 on parent-to-child transfers to February 16, 2023. Proponents of Senate Bill 668 argue that it will require additional time for government agencies to adequately explain the many ambiguities in the new bill.
Given the need for additional formal interpretation of the law by many in both the public and private spheres, including the California Assessors Association and the California Board of Equalization, additional guidance on how to implement the law is expected. For more details on Proposition 19, see Time Is Running: Changes to the California Property Tax Revaluation Exclusion go into effect February 15.