Proposed estate tax changes: prepare now to preserve your assets

By Derrek Klimek, CFP®, CPA

This is the first in a series of articles explaining the importance of exploring estate planning strategies in anticipation of expected tax changes that could be enacted under the Biden administration.

The proposed American Family Plan (AFP) legislation currently working its way through Congress underscores the importance of thorough and agile estate planning because it challenges several longstanding tax concepts and strategies: capital gains deserve a lower tax rate than wages and are an incentive to invest without discouraging sales; people should inherit assets without paying capital gains taxes based on unrealized gains; and taxes should be limited on income already taxed at another level, such as assets purchased with after-tax funds.

Most economists agree estate and capital gains taxes amount to a second or third layer of tax on the same income. The Tax Cuts and Jobs Act of 2017 (TCJA) addressed this situation by increasing estate, gift tax, and generation-skipping tax (GST) exemptions and effectively eliminating the federal estate tax for all but the ultra-wealthy. In 2021, anyone can give away up to $11.7 million during their lifetime or at death without being subject to federal gift or estate tax; amounts above the exemption are taxed at 40%. The TCJA is set to expire in 2025, unless new legislation is passed that changes the rules, such as AFP.

The AFP legislation proposes changes retroactive to Dec. 31, 2020 – years before the TCJA is set to expire – that would substantially impact many estate plans by:

• Reducing the estate and GST exemption to $3.5 million and the gift tax exclusion to $1 million, per person – amounts that would not be indexed for inflation.
• Increasing tax rates to 45% for estates from $3.5 million to $10 million, while estates $1 billion and over would be taxed at 65%.
• Taxing unrealized gains on appreciated assets at death at a top rate of 43.4% (up from the current top rate of 23.8%), effectively treating death as if it is a sale, with a $1 million per person lifetime exemption. This increase would be in tandem with an elimination of the step-up in basis that has been part of the tax code since the Revenue Act of 1921. These proposed changes work together since without the change to the basis rules, the 43.4% tax rate could decrease tax revenue because it would encourage people to hold assets that they might otherwise sell. Charitable bequests and family-owned businesses given to heirs who continue to run the business would be exempt.

Our take: It’s a good time to review and update your estate plan

You may want to consider a proactive change in course before an overhaul of the tax code is implemented. With expert guidance from your Rehmann advisor, you can explore:

• Setting aside what you know you need and use gifting to take advantage of current record-high estate and gift tax exemptions.
• Giving appreciated assets to charity and donor advised funds to bypass capital gains taxes and take an advantageous charitable contribution deduction against other income.
• Placing assets in a trust to avoid potential gift, estate or GST tax increases.

Talk with your Rehmann advisor today for personalized service to help you navigate these uncertain times with short- and long-term strategies that ensure you have the resources you need today, while protecting your estate for future generations.

You can learn more about planning opportunities for your organization by joining Rehmann’s Empowered Planning series of webinars. These complimentary webinars and Q&A sessions are taking place throughout this year and provide expert insight and real-time examples of organizations and individuals who are seeking to build and maintain a strong financial foundation during these changing economic times. Learn more about the series, which is focused on planning ideas to help you move forward confidently, at Rehmann.com/webinars.

Look for next month’s article in our estate planning series: A good estate plan starts with thorough documentation.

Derrek Klimek develops creative strategies that help clients work toward meeting their financial goals, integrating asset management and retirement plan services with overall business and financial plans. He works with a cross-functional Rehmann team to proactively guide each client, considering tax law and efficiencies, estate planning, and accounting needs along the way.