Estate Planning Changes Update

Special Topics Taxes

It’s been over six months since we last took inventory of where we stood in the face of tax changes (increases) affecting estate planning. We are happy to report that in that time we have gained a firm understanding of the changes that are set to occur. Estate planners should have clarity on how to work through the changes with their clients in a timely manner and at a leisurely pace before the end of the year. Hey look, flying pigs!

As Paul wrote to the Corinthians, “For now we see through a glass, darkly.” While we may have some ideas on what is coming with the current tax policy, the full picture remains murky. Here’s what we are reading and listening to regarding tax changes and other factors affecting family businesses and estate plans.

What Are the Exact Changes as Proposed?

Fiduciary Trust International highlighted the key tax issues currently at hand regarding estate planning. These included:

  • The top individual federal income tax rate could increase from 37% to 39.6%.
  • Long-term capital gains tax rate could increase from 23.8% to as high as 43.4% when including the net investment income tax of 3.8%.
  • Cost basis ‘step-up’ could be removed for gains of over $1 million on inherited assets.
  • The federal estate tax rate could increase on a progressively sliding scale for assets transferred over $3.5 million.

A reduction in the gift and estate tax exemption has not been explicitly included in the current round of changes. Given that the current limits are set to expire in 2025, one may wonder if conserving political capital was not part of the equation in leaving the current $11.7 million exemption ($23.4 million for a married couple) in place. One piece of advice the article gives: consider using your full estate and gift tax exemption before the exemption amount is set to decrease.

Tax Update: How Proposed Tax Changes Could Impact Family-Owned Businesses

Family Business Magazine sponsored a webinar featuring two members from BMO Family Office discussing tax planning and tax changes that could affect family businesses – including tax considerations for buying and selling, the tax impact for C corporations vs. S corporations, and 1031 exchanges. The webinar is free for replay when you sign up. Overall, the speakers are ‘bullish’ (read: not convinced) at the likelihood of the full tax changes coming to fruition. One of the speakers highlighted that the step-up in basis at death has been repealed multiple times legislatively, all to be reversed shortly thereafter. He cited the administrative nightmare of determining basis in family businesses/assets that have been held by families for decades.

Bipartisan Infrastructure Deal Still Faces a Long, Uncertain Road

MarketWatch highlighted the recent U.S. Senate movement on the stand-alone infrastructure bill coming in at a cool $1 trillion in new infrastructure spending. However, the Biden Administration’s proposed tax increases would be included in the larger $3.5 trillion budget reconciliation process and are not currently part of the bipartisan traditional infrastructure bill. Benjamin Salisbury, director of research at Height Capital Markets, relayed the following in an investment note:

  • “We maintain our estimate of a roughly 35%-45% probability of passing a joint bipartisan infrastructure bill and slimmed down reconciliation bill, although the situation is highly fluid.”
  • “A lesser probability (20%-30%) is that either the infrastructure bill or reconciliation bill pass on their own.”
  • “Lastly there is an ever present risk (25%-45%) that the entire effort will collapse under its own weight. We continue to regard the inflation narrative as the largest risk to passage.”

Moderate Democrats Remain Skeptical

Elected moderate Democrats remain the most watched politicians in the U.S. today, with multiple congressmen giving pause to the full slate of tax increases and new spending. Senator Kyrsten Sinema (D-AZ) said to the Arizona Republic, “I have also made clear that while I will support beginning this process, I do not support a bill that costs $3.5 trillion.” Senator Joe Manchin (D-WV) indicated months ago that he does not support raising the corporate tax rate to 28%. House Agriculture Committee Chairman David Scott (D-GA) has criticized Biden’s plan to get rid of the so-called step-up basis, worrying about its impact on family farms and small businesses. Senator John Tester (D-MT) shared a similar sentiment regarding the basis step-up.

Further Reading

National Law ReviewPresident Biden’s Tax Plan Impacts Estate Planning, Capital Gains
Northwestern MutualWith Gift Taxes and Estate Taxes in Congress’ Sights, Consider Revisiting Your Estate Planning
Barnes & Thornburg LLPUnprecedented Changes Proposed to Gift and Estate Tax Laws
KiplingerBiden Hopes to Eliminate Stepped-Up Basis for Millionaires

Final Thoughts

One of my favorite books in 2020 was Radical Uncertainty: Decision-Making Beyond the Numbers. The authors make the distinction between risk (quantifiable: think roulette tables) and uncertainty. Most of life is uncertain, and we are naïve to place numbers and probabilities on all aspects of our lives. The authors note, “Radical uncertainty cannot be described in the probabilistic terms applicable to a game of chance. It is not just that we do not know what will happen. We often do not even know the kinds of things that might happen.” Tax changes are quantifiable risks, political machinations in Washington represent uncertainty. Our actions need to represent this distinction.

Thus, we leave you with the same advice we provided six months ago: take care of your family and make sure your current estate plan makes sense today. We provide valuation 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.