FINANCIAL PLANNING

The Ever-Changing Tax Code

An eerie quiet fills the offices of estate attorneys and tax accountants. They are anxiously awaiting the indications from Washington about how Democrats plans to reverse the Trump administration’s tax legislation and pay for COVID stimulus.

Wealthy families should not be surprised. The federal government is carrying massive debt loads. Many state and local governments are struggling with lower tax revenues, high healthcare costs, and underfunded pension plans. With a Democratic White House, Senate, and House, there is a desire to tax millionaires to reduce disparities. However, changing the tax code is risky and often unpopular — efforts to increase taxes on millionaires may unintentionally tax job-creating small business owners and family farmers.

Some of the changes Congress may consider include:

  • Increasing individual income tax rates for the highest brackets

  • Increasing the long-term capital gain tax

  • Limiting individual deductions

  • Reducing federal estate tax exemptions

  • Eliminating the step-up in basis at death

  • Increasing corporate income taxes

  • Curtailing present value discounts for gifting illiquid assets

  • Limiting Generation Skipping Trusts or Dynasty Trusts

  • Restricting Grantor Retained Annuity Trusts (GRATs)

Individuals should assume that everything is on the table.

DON’T PANIC. Tax policy and regulations change all the time. The key takeaway is this:

For wealthy families, working with an estate attorney, tax accountant, financial planner, and investment advisor is an ongoing ANNUAL effort to take advantage of the best opportunities available and minimize the downsides.

Families who failed to take advantage of the recent favorable tax environment may have missed opportunities but should not give up hope.

Here are a few examples of how wealthy families might respond to future changes.

  • If the federal estate tax exemption is lowered:

    • Make annual gifts to your heirs more aggressively.

    • Give more of your estate to charity.

    • Consider life insurance to benefit your heirs.

    • Make lifetime tuition or medical payments for your heirs.

  • If individual income tax rates increase for the highest brackets:

    • Manage your income down

      • Shift investments from taxable bonds to municipals.

      • Take distributions from Roth IRAs rather than traditional IRAs.

    • Shift high income producing assets to low income earning members of your family.

  • If the step-up in basis on death is eliminated:

    • Start a program to periodically sell low basis stock and diversify your portfolio.

    • Consider funding a Charitable Lead Trust or Charitable Remainder Trust with your low-basis stock.

    • Donate appreciated stock to charity.

These are just a few examples of how you may address changes in estate or income tax code. Your family’s team of experts can help you prepare for and capitalize on the best opportunities in 2021, and every year going forward.

Many accounting firms are organizing webinars in the coming weeks to educate clients about tax planning opportunities under the Biden administration.

Remember, tax and estate planning are rarely a one-time experience. For families with complex financial considerations, these are ongoing efforts and your financial planner and investment advisor can assist.

Don’t wait until December of any year to start. The most valuable strategies take time to set up and implement. Time is one tool that families may use to their advantage.

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