“Income Taxes slated to rise.” “SALT Limitation may be eliminated.” “Step-up in Basis at death may be eliminated.” “Annual Gift Tax Exclusion to be reduced.” “Death Taxes to increase.”

Stressed out? Ambivalent? Not sure what to do? Analysis paralysis? Eagle Ridge attended the 55th Annual Heckerling Institute on Estate Planning held virtually the week of May 3rd. We are pleased to share some insights with you from this event, which is traditionally attended by the nation’s top wealth advisors, for consideration and discussion with your professional advisors.

Change to the existing Internal Revenue Code (IRC) later this year is likely, according to a consensus among Heckerling speakers and attendees. The principal questions revolve around:

  • Which elements of the IRC (income, estates, gifts) will change?
  • How much will tax rates increase and exemptions be reduced?
  • When will the changes take effect…on January 1, 2021, on the effective date of law passage, or on January 1, 2022?

Long-term capital gains taxes, currently at a maximum 20% federal rate, are expected to increase, perhaps midway, between the current rate and a proposed 39.6% rate. Ordinary income taxes will likely increase as well; both long-term capital gains and ordinary income tax rates are proposed to affect taxpayers at a taxable income level above $400,000.

There has been speculation as well that the “SALT (state and local income tax deduction) limitation”, enacted as part of the 2017 Tax Cuts and Jobs Act, may be increased as part of a bipartisan agreement once Congress begins negotiating. Relaxing the limitation on deductibility of state and local taxes for taxpayers who reside in high income tax states would temper any proposed ordinary income tax increase at the federal level.

Federal estate and gift taxes are another area where substantive change may occur. The present exemption for use during life (gifts) and/or at death (bequests) rests at cumulative transfers of $11.7 million per taxpayer. Transfers by a taxpayer currently in excess of this cumulative amount are subject to a flat transfer tax rate of 40%. There are several proposals in this domain that would effectively “decouple” as well as reduce the federal exemption on lifetime gifts to $1 million and deathtime transfers to $3.5 million, while possibly increasing the maximum transfer tax rate to as much as 55%. An additional proposal to limit certain types of annual exclusion gifts could accelerate the use of proposed, reduced, and lifetime transfer exemptions, discussed above, if enacted. Specifically, annual gifts of securities and cash not exceeding $15,000 per recipient, per year would remain transfer tax free. However, annual gift exclusions for transfers in trust would be capped at $30,000 per transferor, unless the recipient could immediately liquidate the transfer.

Many of the alphabet soup of “popular planning techniques[1]”, such as GRATs, IDGTs, FLPs, BDITs, SLATs, etc., designed to “leverage” the transfer tax exemption through discounted valuations for lack of control, liquidity and marketability of minority ownership interests may also be curtailed or effectively eliminated.

Of the proposals presented before Congress thus far this year, most tend to opt for a January 1, 2022 effective date. Indeed, most federal tax legislation enacted over the past half century has been prospective rather than retroactive. Taxpayers who wish to rely upon historical trends may want to give consideration to planning opportunities with a view toward implementation over the remaining seven months of 2021.

To conclude, reviewing and revising financial plans is always in vogue, not simply when tax laws are poised to change. Family objectives and family circumstances change much more frequently than tax laws, which is why wealth planning is never a “one and done” proposition.

As always, our professionals at Eagle Ridge Investment Management, LLC are available to discuss these and other wealth management planning opportunities with you and your professional advisors. The information we present in this blog is general in nature and is not intended to recommend any specific legal, tax or investment idea.

[1] Grantor Retained Annuity Trusts, Intentionally Defective Grantor Trusts, Family Limited Partnerships, Beneficiary Defective Income Trusts, and Spousal Lifetime Access Trusts.