President Biden’s priority list may make it appear that no real changes directly related to estate planning is coming down the pipeline. But if recent history is any guide, we cannot count on the estate planning landscape remaining settled and predictable. Here’s what we know so far with regard to proposals coming from the White House.
Action from the First One Hundred Days That Could Affect Your Estate
While some of the White House 100 Day priorities have been started, most of President Biden’s priorities are still in their infancy. The details of how these latter priorities will be implemented and funded remain undetermined. The following steps have already been implemented or proposed in Biden’s plan:
The American Rescue Plan.
In early March, President Biden signed this $1.9 trillion COVID-19 relief bill, providing
The American Jobs Plan.
At the end of March, President Biden outlined a nearly $2 trillion infrastructure and jobs plan that would be funded primarily through a corporate tax hike and additional measures designed to discourage U.S. corporations from moving their operations overseas to reduce or eliminate U.S. taxation (i.e., “offshoring”).
The American Families Plan.
In late April, the White House also announced this proposal designed to help families cover basic expenses, gain greater access to health care insurance, and reduce child poverty through the use of child tax credits and similar measures.
PAYING FOR THESE PROPOSALS
Paying for the approved spending and future benefits will require some changes to the tax law that would likely affect estate planning. Some of the proposed changes most frequently discussed include:
1. Elimination of the rule of step-up in basis at death.
Under current law inherited property receives a “step-up” in basis to the fair market value of the property at the time of the property owner’s death. This step-up in basis results in wiping out any capital gains that could have accrued during the owner’s life. The proposed change to the step-up basis rule could limit the availability of the step-up in basis to only those gain which would be less than $1 million and any gain greater than $1 million would no longer enjoy the benefit of being completely wiped out as current law provides. So, if the sale of inherited property results in a capital gain greater than $1 million, the gain could be subject to a capital gains tax. The proposal currently envisions treating certain inherited property such as businesses and farms differently and this kind of property may continue to enjoy the benefits provided under current law.
2. Increases in top income tax rate and elimination of capital gain rates for high income earners.
Certain changes may be made to income tax rates and capital gains rates affecting high income earners. Specifically, the current top individual income tax rate could be increased from 37% to 39.6%. Furthermore, individuals earning more than $1 million a year would no longer be able to pay certain earnings at the lower capital gains tax rates but instead pay these earnings as ordinary income.
3. Reducing potential benefits of 1031 exchanges.
Under current law investors can defer the recognition of capital gains on the sale of property if they make a 1031 exchange, which involves purchasing a similar property with the proceeds from the sale. The proposal would reduce the benefits available when investors would otherwise make a 1031 exchange when selling and buying another similar property.
4. Increase IRS enforcement efforts of wealthy taxpayers.
The IRS has had staffing problems for multiple years with Congress refusing to increase the size of it workforce. Some observers believe that the lack of staff has led to lax enforcement of current tax laws. The White House has proposed increased funding for enforcement to combat tax avoidance abuses and increase audits to ensure taxes that are in fact owed are being assessed and collected.
Flexibility Is Key in These Uncertain Times
In light of these possible changes and changes certain to come, your estate plan should be designed in a way that enables you to move quickly and take advantage of estate and tax planning opportunities that arise.
Including a role for a trust protector may be the easiest tool to include in your estate plan to keep the plan flexible and relevant in the event that you do not amend your trust before your demise. A trust protector can hold many different powers, including administrative powers traditionally held by a trustee, such as the power to make distributions, and judicial powers traditionally held by a court, such as the power to alter provisions to increase tax savings.
Additionally, there remain many non-tax-related reasons to keep your estate plan up-to-date and relevant to your circumstances:
● Protecting your property for the benefit of your loved ones.
Careful estate planning can do more than just avoid taxes. You can also ensure that your loved ones are the only people to benefit from your wealth by protecting their inheritance from threats such as lawsuits, bankruptcy, divorcing spouses, and poor management and spending habits. By using various estate planning techniques such as trusts, LLCs and family limited partnerships, and exempt property planning, significant protections can be created for your loved ones.
● Staying out of court (probate).
Quality estate planning frequently incorporates a variety of probate avoidance techniques, such as using fully funded trusts, proper beneficiary designations, and lifetime transfers to beneficiaries. By avoiding probate and staying out of court, you can ensure your privacy and prevent challenges to your estate planning that probate proceedings encourage.
● Planning for incapacity and your long-term care.
If you become incapacitated, you can ensure that only those whom you trust manage your healthcare decisions and finances by
○ using a fully funded revocable trust and
○ keeping current your powers of attorney for financial and healthcare matters.
If you want to review your plan in light of the above please let us know. Together, we can make sure you are prepared for whatever may come.