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Estate Planning in 2021

Attorney Thomas B. Burton is joined by Attorney Matthew Underwood, of Underwood Legal, LLC, and together they discuss Estate Planning in 2021. In this video, they cover several estate planning trends and tax levels in 2021, including the current estate tax exemption level, the annual exclusion amount (the amount you can give away tax-free in 2021 without filing a gift tax return), and the future for estate planning and capital gains tax including possible changes being discussed by Congress in the 2021 legislative session.

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Thomas: Welcome back to Ask the Attorneys!

Today's topic is Estate Planning Trends and Taxes as we head into the new year of 2021 and once again, I'm joined by Attorney Matthew Underwood and Matt, thanks for joining us.

Matthew: thanks for having me Tom. It's always great to talk about these estate planning topics.

Thomas: Yeah, so the beginning of the new year, Matt, historically, traditionally, is a time I see many people think about their own affairs, think about their estate planning, maybe they have an estate plan in place, an old plan and they think about updating it or maybe they have no plan at all and after all of us have lived through 2020, a global pandemic in 2020, I think if anything, the last year has shown us all just how fragile life can be. So planning is always an important topic but as we head into 2021, I think planning is on a lot of people's minds but today I wanted to just talk a little bit about what we're seeing in the estate planning world as we head into the new year including, some of the current estate and gift tax limits and maybe things people should be thinking about during the pandemic as they're doing their planning.

So I thought we'd start off maybe in general with Wisconsin, how Wisconsin works with federal estate tax, does Wisconsin have an estate tax, I know I get that question quite a bit and so Matt, maybe you want to fill us in about that, does Wisconsin have an estate tax?

Matthew: yeah, good question and this comes up quite a bit because some people know of estate tax as death taxes. So a lot of people heard the term death taxes and that sounds you know, quite scary. You know, why is the government stepping in when somebody passes away and trying to collect money? So this is something that is on a lot of our clients’ minds but you know, there's really you know two parts to the estate tax. One part is the federal estate tax and so that the federal estate tax applies to, you know, anyone in the united states. It doesn't matter what state they live in and you know that federal estate tax exemption limit is $11.7 million. So that means you don't really have to worry about federal estate tax unless you have more than $11.7 million and if you're a married couple, you get to combine your exemptions, so you can have, you know, over $22 million as a married couple and not worry about estate tax. So that's the federal level as far as the state estate tax is concerned. Wisconsin, actually doesn't have an estate tax and so, the state of Wisconsin isn't good going to try to collect estate tax, there isn't an estate tax here but you might still have one at the federal level, if you're over that estate tax exemption.

So when I talk to clients about the level of our exemption, you know, over $10 million, a lot of our client’s kind of chuckle because they say, 'well, we don't have to worry about that, we're well under that amount' but that number could always change, that our elected officials have the ability to change the tax law and reduce that exemption. So just because we're not concerned about it today with some of our clients, doesn't mean we have to, that we can't be concerned about it later. I mean if laws change, if our client situation changes, then we might have more of our clients face with the estate tax. But I guess are you hearing that same sort of feedback from your clients or a lot of clients concerned about that tax issue?

Thomas: Yeah, I agree Matt, sometimes people come in and I have heard about a death tax or an estate tax and usually, it's a big relief when I can tell them, Wisconsin doesn't have its own estate tax and then when I tell them the federal level is currently above #11 million, for most of my you know, middle class clients, that's a quite generous exemption for their estate. So they don't have to worry about that so much anymore but I recall, just a few years ago, when I was in law school, the exemption was something more like $3 million. So we're historically at quite high levels due to the last tax reform package which was passed in 2018 and if you look over history, I don't know if these high levels will last, they've been high the last couple years but it remains to be seen. There currently, the law says they're going to sunset in 2025 and go back to like, the 2008 levels which was around $5 million. So it's still a generous exemption level, I don't want people to get too worried but Matt's point, what we like to do is try to plan for the present but I always tell people, if we're doing some trust planning and they're anywhere getting close to that federal limit, I try to build in some flexibility in their trust plan in case that limit does come down in the future and that's the great thing about a trust plan is you know, if it dramatically change, we could make some changes inside the trust to adjust for that change in the estate tax level but overall, I think for a lot of clients, the main concern is that there is this estate tax that gets applied to every dollar of their estate, when they pass away and for a lot of middle class people, that isn't the case, the more thing I would say, they have to worry about is the the tax is really the probate court fees and expenses, that are going to eat away at the estate rather than, what we actually call a federal tax.

Now, if you're close to that federal tax, you do want to plan for it because it kicks in at a 40% rate. So over that $11.7 million, it's not like, the income tax where you know, it starts at 10% and goes to 12%, on your income. So the 40% rate, over that amount, is quite significant and that's why people who have heard about estate taxes are generally very aware that it's a significant tax, if you have to pay it.

So the other thing Matt, I get asked often is, along with does Wisconsin have a death tax is, 'How much can I give away per year, tax-free?', something like that, 'how much can I give away without paying tax?' And it's generally because they've heard somewhere, there's an amount, each year they can give to someone, without a gift tax. So do you want to talk a little bit about that level, for this year?

Matthew: Sure Tom, so just in general, you know the gift taxes is in place, so you know, people don't avoid the estate tax and what I mean by that is you know, if I pass away and I own some wealth, that wealth is potentially subject to the estate tax and so, if I'm smart I would say, you know what, I'm just going to give away my property today and that way when I pass away, I won't own anything and I won't have to be faced with estate tax but you know, the IRS is aware that I might try to do that, so the IRS says, well you know what, if you try to give away all your wealth during your lifetime, you know we're going to hit you with that gift tax. So you know, you can't get out of this one. So you know, the the thing is that, there's some exemptions that we can look at for the gift tax and so basically, you have a $15,000 exemption where you can give $15,000 to any particular individual and you won't have to report that to the IRS. So and what that means is you know, let's say you have three beneficiaries, you want each of them to receive $15,000, you can actually get $15,000 to each of those beneficiaries or a total of $45,000 and you won't have to report that to the IRS or worry about gift taxes and if you're married, you and your spouse can combine your exemptions and now together, you can give $30,000 to any particular individual. So when we talk about that, you know some of our clients might want to gift because they truly want to start getting some assets out of their name or maybe they just want to give some property to kids, grandkids, help them, you know with a down payment on a house, help them with a wedding or school loans, so those are some different reasons to look at gifting but you know, if you're under that $15,000, you really don't have to worry about any sort of reporting.

If you're over $15,000, then we end up filing a gift tax return and and then we have to look at your lifetime exemptions which without getting too complicated, are you know, match that estate tax exemption of $11.7 million but even if we go over that number and we're filing a gift tax return, it doesn't mean you're necessarily paying gift tax yet. So that's where, if you're thinking about making a large gift, you know, talk to your attorney first, talk to your CPA and just make sure you fully understand all the consequences because there might be better ways to accomplish your goal rather than giving an outright gift but that's where your professionals can help you with the best way to do that.

Thomas: Yeah, exactly and that $15,000, thank you Matt, is often the number they're looking for, that changes too, you know, a couple years ago, it was $14,000. The IRS bumps it up every couple of years, they'll announce that rate, so for 2021, it's staying at the same as 2020, $15,000 per year, per person and like Matt said, the great thing is you don't have to file a gift tax return, if you make that gift. So if you write that $15,000 check to a child, just keep, keep a copy of the check but you don't have to file the gift tax return but if you gifted them $16,000, that would trigger the requirement to file the gift tax return and like Matt said it doesn't mean you necessarily would owe any tax, it's just you would have to reduce your overall lifetime exemption by the amount of that gift. So that's why Matt, I sometimes point out why the planning to leave gifts at death is so important because this is an opportunity to leave those assets to the next generation and without, if you're under the $11.7 limit, without an estate tax and they can get the property at an advantageous tax basis, as well and that's what we call the step up imbases or the new basis at death rule, that's currently in place.

So if you have an asset that's appreciated over the years, which is often the case with real estate for example, like let's say, a home you bought in 1980, for a $100,000 and then you pass away in 2021 and now it's worth $300,000, well, if you gave that home to your child right before death, the month before you died, they would take your basis in the property which is generally, the price you paid to acquire it. So a $100,000 but instead, if you leave it to them at death, they can get what we call new basis at death meaning they get it appraised at the value as the date of your, date of death and if they are turning around and selling the home for $300,000, then they potentially owe no capital gains tax, on the sale. So that's a really powerful reason why I think a lot of the planning with estate planning is important because for many folks, even if the estate tax isn't an issue for them, that capital gains tax on appreciated assets after they're gone, can be a big deal and one they maybe didn't think about.

Matthew: yeah that's, that's right Tom. You know, I think the general message is we don't expect our clients to be experts in all this because you know, one reason it's, it's just there's a lot of different moving parts to this but also these laws are changing over time. So you know, we really focus our careers and our expertise on keeping up to date on these topics. So that's why we want to be the experts in that so our clients don't have to you know, keep up to date on all these law changes but you know, it's, these reasons where you know, work closely with your estate planning attorney because you know, what we set up for you today, may not be the way the things will be in 10 years because we might need to make changes over time based on tax laws or whatever it might be. So you know it's important to do that but you know, one other thing, I'll mention Tom and when we're talking about, you know, transfer 2021 and this doesn't have to do with tax laws but the trend towards online meetings is very important because estate planning is easier than ever, to get done and you can do most of your estate planning without ever having to leave your house. So you know both Tom and I, we offer zoom meetings to our clients. So please you know take advantage of that, if your attorney offers meetings, so you know, you don't have to make a trip to the office or worry about Covid, you know, we can do things electronically as much as we can and so I think you know, estate planning is easier than ever nowadays, so we really want people to take advantage of these new tools, that we have out there and you know, connect with your attorney and get some good planning in place.

Thomas: yeah, no that's a great point, another trend Matt, in 2021 that I don't see going away, is the virtual meetings and that's been a big positive, one positive from the pandemic which has had a lot of negatives right but the increased adoption of technology, I'm seeing the same thing, many clients now are well aware of what a zoom is, how to do a zoom meeting and other tools as well but it's made it very easy and they can have this meeting just like you and I are talking today and we're 100, over 100 miles away from each other but we still get to have that face-to-face interaction, a real live meeting and no chance of germ transmission during the pandemic. So it's a great way you can meet with your attorney and get things rolling with your estate planning and I think it's, it's going to continue in 2021 and people should just embrace it, take advantage of it as we move forward.

Matthew: absolutely Tom, it'll be interesting to see what happens in the year going forward but you know, I think that's again, that's what we do, we monitor law changes, make sure things are up to date and in that way, we can you know help our clients, make things easier for our clients and you know make sure, they have the best planning in place.

Thomas: great! well thanks everyone for joining us, thanks for tuning in and we'll see you next time.

© 2021 Burton Law LLC. All Rights Reserved. Transcript and captions provided for ease of access for the hearing impaired. For questions about this topic, or to suggest a topic for a future blog post, please contact the office.


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