Uncertainty in Estate Planning: Strategies for Potential Tax Changes During the Biden Administration


Steve Kohler, CFP®, CPFA and Nancy Kunz, CFP®, ChFC®, CLU®


With a new administration now in place, the accompanying changes to tax policy are beginning to become clearer. The impacts could be significant, particularly relating to the amount of wealth individuals intend to transfer either through an estate or through charitable giving. The possible repeal of the 2017 Tax Cuts and Jobs Act (TCJA), and/or the resurrection of proposals made or considered during the Obama/Biden administration, would materially alter the current transfer tax landscape.


The proposed changes, specifically those related to estate tax law, should spark the review of an individual’s current estate plan as to ensure maximizing the value of the current lifetime exemption before it is likely reduced. If certain individuals and families do fail to take advantage of the window, it may create thousands, or even millions in additional estate taxes, and significantly reduce the net amount of wealth transferred.


Proposed & Potential Policy Changes:

  • Lowering the Federal Estate Exemption amount

  • Higher tax rates on long-term capital gains

  • Elimination of step-up in basis at death

  • Reconsideration of itemized deductions related to charitable donations

The federal exemption limit, currently $11.7 million per person, may be lowered to $5.4 million, or perhaps even as low as $3.5 million as was proposed during the Obama/Biden administration. This change may greatly increase the number of estates affected. Furthermore, the associated estate tax rate could go up to 45% (versus 40% currently).

Regarding long-term capital gains, there are discussions that long term capital gains taxes may be changed to reflect ordinary income tax rates. This would likely impact higher income earners most, as the current long term capital gains tax rate is 15-20%.


The proposed ‘step up in basis’ would apply when an heir receives an asset after the benefactor dies. The asset’s stepped-up basis (market value at the time the of the benefactor’s death) is often much higher than the before-death cost basis, which is the benefactor's purchase price of the asset.


For example, if one’s parents bought stock in the 1960s at $10, the stock may now be worth $100 after they pass away. If the beneficiary inherits the stock, under the current legislation, it will have a tax basis of $100 if sold. Under potential legislation, the beneficiary’s tax basis would now be $10, creating a $90 taxable capital gain if sold, a significant increase in tax liability. The same methodology would apply if the beneficiary were to inherit other assets, such as the parent’s house.

In addition to the step up in basis, capital gains tax rates, and reduction of the federal estate exemption, below are potential transfer tax changes that we believe deserve close attention, as well as our initial thoughts on actions to mitigate the impact:

  • Decrease in the current unified (gift, estate, and generation-skipping transfer [GST]) tax exemption: Consider using the full exemption(s) as soon as is practicable.

  • Increase in the current unified transfer tax rate: Use currently available transfer tax exemptions and and/or make taxable gifts to fully use a GST tax exemption.

  • Bring back proposed restrictions on valuation discounts: Review your current wealth transfer strategies to which a valuation discount may apply as soon as possible.

  • Impose restrictions on the use of grantor retained annuity trusts (GRATs) and GST trusts: If you are considering a GRAT strategy or putting GST in place, do so as soon as possible.

  • Change in grantor trust status: Consider whether the benefit of terminating grantor trust status exceeds the benefit of having the income tax payments decrease the grantor’s taxable estate.

  • Modify trusts producing meaningful amounts of taxable income: Have a trusted advisor look into dividing individual trusts into multiple smaller trusts, if qualified for lower income tax rates.

Our current thinking is that the proposed and potential tax changes are unlikely to become effective in 2021, but will likely take hold in 2022. With the potential for substantially increasing the associated tax liability on individuals and families, it is critically important to understand the few proactive strategies that minimize the long-term tax impact. In addition to mitigating the risk of higher estate taxes and capital gains taxes, a broader review of your financial plan may also be necessary. There are a number of additional strategies that may provide substantial benefits to you, your estate, and your beneficiaries over the long-term.


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Steven Kohler, CFP®, CPFA

Senior Financial Advisor

Financial Planning Chair

skohler@dbroot.com


Nancy Kunz, CFP®, ChFC®, CLU®

Financial Advisor

nkunz@dbroot.com


This material has been provided for general, informational purposes only, represents only a summary of the topics discussed, and is not suitable for everyone. The information contained herein should not be construed as personalized investment advice or recommendations. Rather, they simply reflect the opinions and views of the author. D. B. Root & Company, LLC. does not provide legal, tax, or accounting advice. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation. There can be no assurance that any particular strategy or investment will prove profitable. This document contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information derived from such sources, and take no responsibility therefore. This document contains certain forward-looking statements signaled by words such as "anticipate," "expect", or "believe" that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward-looking statements. As such, there is no guarantee that the expectations, beliefs, views

and opinions expressed in this document will come to pass. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.


All investment strategies have the potential for profit or loss. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses.


The impact of the outbreak of COVID-19 on the economy is highly uncertain. Valuations and economic data may change more rapidly and significantly than under standard market conditions. COVID-19 has and will continue based on economic forecasts to have a material impact on the US and global economy for an unknown period.


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