Wills and Estates Planning for 2021: The Good, Bad, and Ugly

There’s no time like the start of the year to plan for the future, even when it comes to estate planning. In fact, for trust and estate attorneys (not to mention their clients), that’s has never been truer than it is in 2021.

For one thing, as we begin the year, we find ourselves in the midst of a public health crisis that has served as an unfortunate reminder of the preciousness of life and the need for even young individuals to have their affairs in order. For another, estate planning has become something of a political sport, and we just wrapped up a big season. As a New York Times Wealth Matters columnist put it: “Tax policy used to be fairly boring and predictable. But in the past decade, it has become dynamic in a way that tax advisers don’t like: It changes with the political party in power.”

This state of affairs puts estate planners in the difficult position of reassessing, if not restructuring, long-term strategies with every shift in the political winds. The changing presidential administrations, of course, represent a major shift indeed. During the last administration, Congress passed the Tax Cuts and Jobs Act, which raised the estate tax exemption (that is, the amount one can pass on tax-free) to $11.7 million as of 2021. The federal tax on amounts exceeding that now stands at 40%.

The high ceiling on the tax exemption may give people relief, but it probably shouldn’t. For wills and estate lawyers, a very real, and very big, question hanging over their work in 2021 is whether that ceiling will be reduced this year. It’s a major element of the good, bad, and ugly of estate planning in 2021.

The Good

Wills and estate lawyers may find their work far more affected by changing politics than they would like, but the good news is this: we at least know what direction the political winds are headed. That wasn’t true even after the presidential election, when it appeared the Republicans might hold the Senate. The Georgia run-offs clarified that President Biden will have a Democratic Congress to work with, however, giving him a real opportunity to affect federal estate tax rules.

On the campaign trail, President Biden signaled his preference to decrease the federal estate tax exemption amount to $5 million, or even as low as $3.5 million, where it stood when he left office as Vice President. He may have designs on raising the estate tax rate, too. The Biden-Sanders Unity Task Force (which included the views of Sen. Bernie Sanders) issued a report in July that could be read to support a tax rate as high as 55%.  

The Bad

Unfortunately, knowing where a politician stood during a campaign is a far cry from knowing what they will actually do once in office. Which leaves those advising on wills and trusts in a precarious position. 

In the case of President Biden, even if he pursued every policy he advocated as a candidate, there’s no certainty he could make them into law. The Democrats have a razor-thin majority in the Senate, meaning they’ll need Republican support to overcome a filibuster. (Unless, that is, they try to push through estate tax changes in the budget reconciliation process.) And, of course, there’s a bandwidth issue — changes in estate law might take a backseat to other legislative priorities at the moment.

“We’re not going to see any massive tax changes because there are more pressing things to worry about at this point,” tax attorney Brian Glavotsky predicted to the New York Times.

Even if all those contingencies were known, and we could say with certainty that new legislation would pass, there is still the unknown of whether Congress would make it retroactive to January 1, 2021, or effective as of some future year. The retroactivity question has many intricacies, but for now, it only adds to the uncertainty. For that reason, the attractiveness of an estate plan and an estate lawyer might be flexibility.

The Ugly

Okay, “ugly” is a bit of a misnomer. But the fact is, some aspects of estate planning are less glamorous than those hashed out in the halls of Congress. Despite that fact, these are the issues that need tending on a regular basis and can make all the difference in fulfilling the wishes of a deceased person. Here are five such issues to consider as we begin 2021:

• Creating a debt-repayment plan: Unfortunately, our debts survive us just like our assets do. If they’re big enough, they can significantly reduce — or even eliminate — the amount that the deceased intended to pass on to beneficiaries. It’s best for everyone concerned to make a regular inventory of your clients’ debts and establish a repayment plan.
• Reassessing the revocable trust: This primary estate planning document can be changed anytime, for any reason. And after a year like 2020, many clients might have reason to make some edits. Whether they own small businesses impacted by the pandemic, realized they want to retire early, or liquidated assets for short-term needs — all such changes can impact sound estate planning.
• Making use of the annual gift tax exemption: There’s one no-brainer tactic that can be employed annually to minimize estate taxes (for those lucky enough to worry about them), and that is taking advantage of the annual gift tax exclusion. Every year, individuals may give up to $15,000 to one or more recipients. Those amounts don’t count against the lifetime gift exemption (discussed below), which makes this strategy even more attractive.
• Considering the impact of the SECURE Act: This 2019 law blew up a number of rules that retirement and estate planners had come to rely on. Most notably, the Secure Act did away with a powerful estate planning tool: the “stretch IRA.” Previously, beneficiaries of IRA plans had to take a minimum distribution annually, but could leave most funds in the account over their life expectancy, building wealth and deferring taxes. Now, most non-spouse beneficiaries of traditional IRAs have to drain those accounts within a decade. The bottom line: IRA owners who had trusts set up for their children will need to rethink their strategies.
• Thinking about using your lifetime gift tax exemption early: We often think of the $11.58 million figure as a limit on what you can pass on at death without paying taxes. But in reality, that figure is a “lifetime gift exemption,” meaning that you can give that much in tax-free gifts at any point in your life. For some people, it will make good sense to use their gift exemption early — especially if they are passing on a gift that is under the threshold now but could appreciate and trigger considerable estate taxes if passed on at death.

With some careful attention to these and similar concerns at the start of the year, wills and estate attorneys can position their clients for success no matter what happens in Washington.