The Biden administration has proposed many changes to both income tax and transfer tax law, wealthmanagement.com points out. While these changes might not be retroactively applied to the beginning of this calendar year, Wealth Management authors caution: “We believe our clients should consider now how these proposed changes might affect them and whether they want to implement certain strategies sooner rather than later”.

At Geyer Law, we agree. Even if you do not experience a significant life event, we recommend re-evaluating your plan every three to five years. We understand that during the first quarter of each calendar year, clients tend to be focused on tax reporting for the prior year. But this year, in particular, it is important to be forward-looking in examining both charitable giving and estate planning in general, and to begin the process early.

Charitable planning
One proposal by President Biden is increasing the top income tax rate from 37% to 39.6%. If enacted into law, that change would have the effect of making charitable gifts “cheaper” by saving wealthy donors more money (money that would otherwise have gone to taxes).

On the flip side, a second proposal is to impose a 28% limit on charitable deductions for high income taxpayers (currently, the value of itemized deductions is limited to 37% of the value of the gift). On the chance this proposal, even if enacted, would not be retroactive, donors might want to accelerate gifting, perhaps using donor advised funds (allowing them to postpone deciding on specific charities while claiming the donation this year).

Yet a third tax change proposal has to do with Social Security tax, now imposed on the first $137,000 of income, applying that tax again on income over $400,000. Taxpayers would be incentivized to contribute income over $137,000 and under $400,000 to charity.

Estate planning
By way of background, under current law, assets are often held for generations. Until those assets are sold, they are not subject to capital gains taxes.  Under current law, the tax basis of property transferred to an heir at death is increased to its current market value rather than its value on its date of purchase, with the result that any appreciation in the value of the property goes untaxed. If the heir chooses to sell the property, the tax is assessed on the new basis (the value when the heir received the assets)….

The Biden Plan proposal is to repeal that step-up basis on appreciated assets on death, taxing unrealized capital gains at death at the proposed increased capital gains tax rate. Clients might want to consider gifting property to children or to charities today, rather than designating those gifts later as part of their estate. Depending on your individual circumstances and preferences, there are different types of trusts that can be used for both charitable giving and transfers to family members.
Even more significant is the proposal to drop the estate tax exemption from $11.70 million to just $3.5 million.

Earlybird planning
“Between myriad documents, individual state requirements, and shifting federal estate tax laws, it’s no wonder the estate planning process can be overwhelming for financial advisors and their clients,” justvanilla.com concludes. “In recent years, your more well-off clients enjoyed favorable federal gift and estate tax exemptions. With a new administration coming, there’s no guarantee these exemptions will continue into next year.”

At Rebecca W. Geyer & Associates, we know that pre-emptive planning is the way to help clients achieve better results in realizing their estate planning and tax planning goals.

– by Cara Chittenden, Associate Attorney at Rebecca W. Geyer & Associates