At Credent Wealth Management, our goal is to keep you informed about relevant policies that could impact your financial plan. We want to share with you a few of those potential updates worth mentioning. As with our other Credent Connect releases, these highlights will tend to focus on personal financial planning topics. As we conclude our series on President Biden’s original tax policy proposals discussed during his campaign, we want to help you understand potential next steps to consider.
President Biden’s Tax Legacy - Balancing the Risk and Opportunities
In addition to the various Planning Notes below, there are some planning strategies we are actively suggesting clients put in place. However, one must make assumptions on whether these new rules will apply in 2021 or start in 2022. It is equally important to keep in mind that we are trying to predict what changes may or may not happen, and no one can foresee the future. If the tax changes are retroactive to Jan 1, 2021, some of the strategies may be more adverse than others. We will discuss some options below from a tax and estate planning view.
Key planning initiatives highlights:
- Limit exposure to future capital gains tax increases: High-income earners with sizable capital gains may look to realize, or harvest, gains as a form of hedging against any increase in capital gains rates.
- Planning Notes: Should the proposed increase happen, it would almost double the top long-term capital gains rate from 20.0% to 39.6%. As an alternative, taxpayers with higher income may want to plan to sell appreciated assets before this potential increase. For owners who may sell their business soon, it may make sense to do so when tax rates are lower.
- Time your income and deductions: Possible increases in income tax rates and decreases in allowed deductions mean the scheduling for income and expense is paramount.
- Planning Notes: If a taxpayer has control over his or her income (compensation, stock options, etc.), he or she may decide to accelerate the income into this year rather than next. Some business owners may want to explore receiving compensation through S-corporation dividends (which are not subject to employment taxes), rather than normal wages.
- Reducing exposure to the removal of a “step-up” in basis at death: Holding appreciated assets until death would rapidly switch from a very desirable tax strategy to an especially undesirable one.
- Planning Notes: We are holding just short of suggesting taxpayers consider recognizing gains before death to avoid a potential 39.6% tax rate on capital gains, although we are monitoring closely. If deemed necessary, this strategy could be pursued through installment sales to non-grantor trusts, charitable trusts, tax-free exchanges, and charitable contributions of appreciated property. Additionally, individuals may use tax-free transfers through a grantor retained annuity trust (GRATs).
- Using more or all of a taxpayer’s remaining estate, gift, and GST tax exemptions: Before a potential exemption reduction occurs, taxpayers could use their remaining amounts by executing gifting strategies.
- Planning Notes: Some trusts are more beneficial in a low-interest rate environment than others. Over the past four years, estate planners have recommended households utilize their exemption amounts, such as spousal lifetime access trusts (SLATs); therefore, spousal exemptions will not be lost. Although the initial planning can be done, we believe it makes sense to wait until closer to the end of the year before executing (which should also be done in coordination with your attorney). Another option to consider is disclaimer planning, including allowing one beneficiary of a trust to disclaim on behalf of all trust beneficiaries to allow the return of assets to the donor (without using any exemption). With the lingering possibility that a retroactive law may be passed, large gifts are a high-risk, high-reward planning strategy. The IRS has confirmed that if a person makes large gifts, and the exemption amount is reduced in a later year to an amount below the value of the previous gifts, those gifts would be grandfathered, and no tax would be due. Under current law, taxpayers have $11.7 million that can be gifted during lifetime or distributed at death without being subject to federal estate tax.
As a result of possible changes under President Biden’s administration, all households, regardless of income, should review their current financial, tax, and estate plans. Credent Wealth Management believes in the power of partnership by utilizing a team of advisors (financial, tax, and estate) to work proactively on your behalf. Please contact our Credent Wealth Management team if you would like to discuss how this personally impacts your plan.
Investment advice offered through CX Institutional, a registered investment advisor.
Disclaimer: As with any financial plan, your individual needs are specific, and you should consult your tax and legal advisors before engaging in any changes to your tax or estate plan. Credent Wealth Management does not provide tax, legal, or accounting advice, and this material has been prepared for informational purposes only.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in the presentation may not develop as predicted.