Family Business Advisory Services

January 11, 2021

A 2021 Estate Planning Reader

While we are not political prognosticators, the recent Senate runoff results appear to have given new life to the Biden Administration’s tax policy goals. Numerous publications have written about the Biden Administration’s tax plan and we do not want to duplicate them here. However, we want to take the opportunity to highlight other thought leaders we are reading and what family business owners should be thinking about given recent political developments.

How Will Joe Biden’s Tax Plan Impact Estate and Gift Planning?

Elliot Davis, a regional accounting firm in the Southeast, highlights two key provisions in the Biden plan: i) the elimination of basis step-ups for inherited assets, and ii) a reduction in the lifetime gift and estate tax exemption. Elliot Davis presents two case studies with the proposed changes – which result in a 10% to 25% increase in the overall tax paid by the estates presented in the case studies.  These increases can be partially reduced with proper estate planning.

Joe Biden Wants to Change Tax Policy. Here’s What He Might Accomplish

Karen Hube at Barron’s highlights Biden’s tax plan and expectations regarding reform. Garrett Watson, a senior policy analyst at the Tax Foundation, ranks two tax increases as being the most likely to succeed: an increase in the corporate tax rate from 21% to 28%, and a bump in the top marginal income-tax rate for folks earning $400,000 or more from 37% to 39.6%, hitting both traditional C Corps and S Corps. The next most likely change would be a reduction in the estate tax exemption to 2009 levels, moving from the current $11.58 million per person, or $23.16 million for a married couple to $3.5 million, adjusted to inflation. This would also raise the estate tax rate from 40% to 45% beyond the exemption. Watson does see certain provisions as unlikely. Watson includes an increase in tax rates on capital gains over $1 million from 20% to 39.6% and a new 12.4% payroll tax on earnings over $400,000, citing a combination of political friction and complexity to draft and administer. Watson and other analysts agree that one aspect of Biden’s plan would be dead on arrival in Congress: an elimination of the step-up in cost basis at death.

Richest Americans Brace for Higher Taxes, Await Moves by Biden, Senate Democrats

A new concern for estate planners is delivering the news that it may be too late. Bloomberg suggests that Biden and the Congress could make tax hikes effective as of the beginning of 2021 or delay any changes to 2022 or 2023. The threat of a retroactive tax law means wealthy families and investors do not know which rules apply to transactions conducted right now. Bloomberg indicates most advisers see retroactive tax changes as unlikely but urge caution and recommend getting your estate plan in order.

After the Georgia Runoff, What Tax Planning Should You Do NOW?

Martin Shenkman, an estate planning attorney, provides a comprehensive list of possible tax changes as they relate to gift and estates, as well as income and capital gains taxes. He also lists a number of strategies used by estate planners and potential reductions in the benefits of these strategies, including the use of Grantor Retained Annuity Trusts, Grantor Trusts, and Generation Skipping Transfer Taxes. We will lay a "wet-blanket" on the more aspirational policy devotee (perhaps at our peril).  Democrats will hold both the U.S. Senate (by virtue of future Vice President Harris, a Democrat, being a deciding vote in the 50-50 chamber) and the U.S. House, (222 for Speaker Pelosi’s caucus and likely 213 for the Republicans) with relatively narrow margins by historical standards.  This narrow mandate gives Democrats room for only 5 defections in the House on any single piece of legislation, with no room in the Senate. Considering these realities, we suspect more wide-reaching policy goals promised during the campaign may be tempered to preserve needed political capital for the incoming administration’s key policy objectives. Additionally, in a January 10th piece from Barron’s,  Chris Senyek, chief investment strategist at Wolfe Research noted the average tax-reform bill takes 15 months after a new president is sworn in to become law. If history holds, this fact should give markets, and families, time to digest and plan for future tax changes.

Final Thoughts

We leave you with this advice: the best time to take care of your family and estate plan was yesterday. The next best time is today. We provide valuation and other financial advisory services to families seeking to optimize their estate plans.  Give one of our professionals a call to discuss how we can help you in the current environment.

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