This year has been unprecedented from a political perspective in many ways. President Joe Biden stepped into office facing huge obstacles related to the COVID-19 pandemic, an economy battered by the pandemic, a crumbling national infrastructure in dire need of repair, an ongoing immigration crisis at our southern border, and deep political and social divisions in this country, among other challenges.
As Biden entered office, he named the following issues as his top priorities:
- Getting past the COVID-19 pandemic through masking, vaccinations, and opening schools
- Addressing climate change and alternative energy solutions
- Financial regulation and student debt
- Anticompetition practices among the leading companies in Big Tech
- Revitalizing the economy and employment to recover from the pandemic
- Improving international relations
- Race, gender, and social issues
With these issues at the top of Biden’s priority list, it may appear that no real changes are coming down the pipeline that are directly related to the estate plans of most Americans of average means. But if recent history is any guide, although many of us hope that the estate planning landscape will remain settled and predictable, it is unlikely that we will be so lucky. Here’s what we know so far with regard to proposals coming from the White House.
Action from the First One Hundred Days That Could Affect Your Estate
While many of the issues Biden has prioritized have begun to be addressed within his first one hundred days in office, many of them are still in their infancy, with the details of how they will be implemented and funded still to be determined. The following steps have already been implemented or proposed in Biden’s plan:
- In early March, Biden signed a $1.9 trillion COVID-19 relief bill (named “The American Rescue Plan”), providing stimulus payments, unemployment benefits, and child tax credits to millions of Americans to help stimulate the economy.
- On March 31, through the “American Jobs Plan,” Biden outlined a nearly $2 trillion infrastructure and jobs plan that is to be funded primarily through a corporate tax hike and additional measures designed to discourage U.S. corporations from moving their operations overseas to reduce or eliminate U.S. taxation (i.e., “offshoring”).
- The American Rescue Plan also allocates significant funding for providing vaccinations to all Americans at no cost if needed, and additional funds to help the nation’s food service industry and K-12 schools survive the financial impacts of the pandemic.
- The proposed “American Families Plan” by the White House in late April is also designed to help families cover basic expenses, gain greater access to health care insurance, and reduce child poverty through the use of child tax credits and similar measures.
These large spending bills, both passed and proposed, will need to be funded in some manner. Currently the following are some of the changes to the tax laws that could have a significant impact on your clients’ estate planning:
- Increase IRS enforcement efforts of wealthy taxpayers. The White House has determined that significant tax revenues are being left on the table due to the inability of the IRS to enforce current tax laws. Biden has proposed increased funding of the IRS to enforce laws against tax avoidance abuses and increase audits to ensure taxes that are in fact owed are being assessed and collected.
- Elimination of the rule of step-up in basis at death. This proposed change to the tax code would eliminate the benefit of receiving a step-up in tax basis on inherited property in the hands of a deceased individual’s heirs and beneficiaries for gains in excess of $1 million (or $2.5 million per couple when combined with existing real estate exemptions). This could result in significant capital gains taxes being assessed upon the sale of the property once it has been inherited. However, certain exceptions to this rule for small business owners and farmers would be preserved under the proposed legislation.
- Increases in top income tax rate. Another Biden proposal under consideration is the increase in the top individual tax rate from 37 percent to 39.6 percent and elimination of the lower capital gains tax rates otherwise available for those earning over $1 million annually. Rather, capital gains would be taxed as ordinary income for those earning over $1 million annually.
- Reducing potential benefits of 1031 exchanges. The President is calling on Congress to reduce the benefits available with the special tax break that allows real estate investors to defer paying capital gains taxes when they exchange properties.
Flexibility Is Key in These Uncertain Times
We are living in a time of significant uncertainty when it comes to estate planning and the economy. As a result, it is more important than ever to ensure that your clients’ estate plans are designed in a way that enable them to move quickly and take advantage of estate and tax planning opportunities that may arise or those that may be eliminated soon.
Additionally, there remain many non-tax-related reasons to encourage your clients to keep their estate planning up-to-date and relevant to their current circumstances:
- Protecting property for the benefit of your client’s loved ones. Careful estate planning can do more than just avoid taxes. Clients can also ensure that their loved ones are the only people to benefit from their wealth by protecting inheritances from threats such as lawsuits, bankruptcy, divorcing spouses, and poor management and spending habits. By using various estate planning techniques such as trusts, LLCs and family limited partnerships, and exempt property planning, significant protections can be created for a client’s loved ones.
- Avoiding probate courts. Quality estate planning frequently incorporates a variety of probate avoidance techniques, such as using fully funded trusts, proper beneficiary designations, and lifetime transfers to beneficiaries. By avoiding probate, clients can ensure that their family’s privacy is maintained and prevent needless court interference and challenges to their estate planning.
- Planning for incapacity and long-term care. Using powers of attorney, healthcare directives, trusts, and healthcare privacy information authorization documents, your clients can ensure that only those whom they trust to manage their healthcare decisions and finances are the ones to do so if they ever become incapacitated.
Keeping abreast of the whirlwind of changes in the law and the economy can be a tall order for anyone when it comes to maintaining an estate plan. That is why having an estate plan with appropriate provisions that allow for flexibility is so important. We are prepared to keep you and your clients apprised of the legislative changes that are headed our way and will help you stay informed so you can move quickly if changes to your clients’ estate plans become necessary. We always welcome a call from you to discuss how we can help you and your clients prepare for whatever may come.