With a new presidential administration at the helm of our federal government, as well as a new majority in the U.S. Senate, changes to the estate tax laws may be on the horizon on the federal level. On the state level, the state estate tax exemption will remain at its current level of $5.49 million per person, at least for now.
President Biden's proposed tax plan includes provisions to expand the estate and gift tax by restoring the rate and exemption to 2009 levels–$3.5 million for the estate tax exemption and $1 million for the lifetime gift tax exemption, with an increased maximum tax rate of 45%. And even if such provisions are not passed, the current $11.7 million federal estate tax exemption per person is set to decrease significantly at the end of 2025 to $5 million, adjusted for inflation, unless congress acts to make the current exemption permanent. Biden's proposed tax plan also includes the elimination of the "step-up in basis at death" provisions for inherited assets, meaning that a beneficiary would either assume the decedent's cost basis in the asset or the unrealized appreciation could be taxable at the decedent's death.
On the state level, proposals to lower the current Hawai'i State estate tax exemption to $1 million were introduced this year, but ultimately did not pass. Accordingly, the current level of $5.49 million per person remains in effect until the topic is revisited by the Hawai'i Legislature in the future.
Although there remains uncertainty at the federal level as to further estate and gift tax law changes, now is a good time to reevaluate your estate plan to make sure you have the basics in place. Below are some items to consider:
- Review your beneficiary designations on items such as retirement accounts and life insurance policies, especially if you have experienced a major life event (such as marriage, divorce, or the birth or adoption of a child). Remember, creating a will or a trust does not override beneficiary designations on assets like IRAs, 401Ks, annuities, and pension/profit sharing plans. Verifying your beneficiary designations are up-to-date can save your loved ones a lot of headaches down the road.
- If you have a trust as part of your estate plan, verify that the trust is properly funded with, for example, your real property, brokerage accounts, and other assets. Failure to title assets in the name of your trust may trigger probate at your death, defeating a significant benefit of creating a trust in the first place. This may also be a good time to ensure that your trust is drafted with as much flexibility as possible to address possible changes in the tax law in the future.
- Organize your digital assets. While you do not have to catalog every file on your computer, do make a list of the major items, such as cloud or local storage of your digital photos, videos, and documents, as well as email, social media, and financial accounts (including Venmo and PayPal). You also want to make sure you have included provisions in your trust or will to allow your agent access to such assets. The easiest and safest way to make sure your agent, executor, or such other trusted individual can access your accounts is via a password manager.
- To the extent you have significant assets (i.e., approaching or greater than the current federal exemption amounts), consider the gifting or transfer of assets. Now is a unique "use it or lose it" opportunity to move assets to the next generation by taking advantage of the current unprecedented exemption amounts still available.
Originally published May 6, 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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