Potential Tax Law Changes – What Do We Know Now?
With tax reform potentially on the horizon, there are many prognosticators attempting to guess what things will look like. Things are still very unclear, but with the recent release of the Biden administrations 2022 revenue proposals, commonly referred to as the Green Book, we know better what the wish list looks like. Here are a few things that could affect your estate planning:
Increase the long-term capital gains rate and qualified dividend income rate to 39.6% to the extent the taxpayer’s income exceeds $1 million, indexed for inflation. This proposal is proposed to be effective retroactively for gains and income recognized after April 28, 2021.
Treat death and lifetime gifts of appreciated property as a realization event that requires gain to be recognized as if the underlying property was sold. Gains on a gift or bequest to charity would not be recognized, making charitable gifts more appealing. Gains on a gift or bequest to a spouse would not be recognized until the spouse dies or disposes of the asset, but the tax basis would carry over. This recognition of gain would be subject to a $1 million lifetime exclusion amount. Additionally, payment of tax on the appreciation of certain family-owned and operated businesses would not be due until the interest in the business is sold or the business ceases to be family-owned and operated. With some exceptions, payment would be allowed over 15 years. Under current law, transfer by gift or death is not taxable, and upon death, the decedent’s heirs get a “stepped up basis” to fair market value at the time of death. These rules would become effective after December 31, 2021.
Tax would be imposed without a realization event on the unrealized appreciation of assets of a trust, partnership or other non-corporate entity if there has not been a recognition event with respect to the asset within the prior 90 years, beginning on January 1, 1940. This rule would become effective after December 31, 2021.
Impose a $500,000 per person per year limit ($1 million in the case of married individuals filing jointly) on the aggregate amount of section 1031 like-kind exchange gain deferral. Any excess gain would be recognized in the year of the exchange. This change would take effect for taxable years beginning after December 31, 2021.
One thing that is notably missing from President Biden’s proposal is a decrease of the current estate tax exemption. However, the unlikely to pass, there is still a bill pending in the senate that would reduce the exemption to $3.5M per person. Even if no such proposal passes, the exemption will automatically reduce by half in 2026 if current law is not extended or made permanent by then.
So what should you do now? Make sure you are consulting with your advisors and being prepared. Given the concerns with these changes, advisors are working overtime to service their clients. The longer you wait, the more likely your advisor team will not have sufficient time to address your situation. So if your estate may have issues, don’t wait.
