The past year was one of confusing estate tax law change proposals, many of which could prove devastating to family farms and businesses if passed. Some notable proposed changes include:
- Subjecting more assets to estate tax by reducing exemptions. This one change may mean an extra $4.8 million check to the IRS, which could very well bring an end to many family operations. This is the single largest issue, and it is currently scheduled to occur at the end of 2025 with a reduction from $11.7 million to $5 million plus inflation, per person. Everything above the exemption limit gets taxed at prevailing rates.
- Taxing at higher estate tax rates: 45% proposed versus 40% current
- Eliminating and restricting traditional approaches to reducing tax cost. Many commonly used techniques like valuation discounting, family sales, and funding grantor trusts (like many life insurance trusts) were targeted and would become much less effective. This proposal could even cause problems for trusts that have been established for many years, depending on how they are being managed.
- Creating new potential double taxation scenarios by eliminating the step-up in basis at death. Imagine having to sell an asset after someone has passed away to distribute money to multiple heirs, pay off debt, pay taxes, or for any other reason. Under current law, you can often do that free of capital gain tax; however, the new proposal calls for capital gain treatment from the deceased owner’s basis. In other words, if Dad bought a land parcel back in 1983, you would owe tax on the gain in value since then.
- A potentially very short timeline was proposed that would allow us to implement tax-saving strategies in advance, with deadlines effective Jan. 1, 2022, or upon enacted legislation.
Estate tax provisions were part of the president’s American Families Plan and the Build Back Better (BBB) House proposals. The Bipartisan Infrastructure Bill, which was signed into law on Nov. 15, 2021, never had estate tax provisions in it.
At the time of this writing, it is not clear if or when a Build Back Better bill will pass. There are too many divergent positions among the president, Senate, House, progressive caucus, House moderates and other Washington factions to speculate on what will be includible in a final bill. The proposals that have been made are so drastically different from each other that it’s much more productive to focus on the opportunities made available under current law, rather than guess what will come out of Washington next.
The extra $4.8 million tax mentioned earlier can potentially be reduced, frozen so it doesn’t get worse, or even eliminated altogether with tried-and-true techniques. Defending your family legacy from unnecessary tax requires action, and you have a window to capture this opportunity.
In many situations, losing the opportunity will mean losing the family farm. If I told you that someone is coming to take $4.8 million from your family, what exactly would they be taking away? Land? Equipment? Buildings? A business? Would your legacy survive that loss? Doing nothing means standing by and letting this happen.
Given all of the uncertainty, and the severity of what is at stake, here are six things you can do right now that will move you closer to preserving your legacy, both in terms of assets and relationships by being proactive and helping you avoid becoming a burden on others.
- Compare your ideal estate distribution to your current estate distribution: What percentage or dollar amount is going to family, charity, the IRS, legal fees and other recipients? How much do you want to go to each?
- Schedule a second opinion with an estate planning professional to avoid accidental disinheritance (There are eight ways to disinherit. Tax is one, but it’s not the worst offender.) Have a “plain English” discussion. Debrief current legal documents. Design or redesign your estate plan as necessary, and review your implementation process.
- Review other key areas. Ensure healthcare wishes are documented and up to date. Make sure all parties know and understand current roles and responsibilities, e.g., trustees, executor, power of attorney, operations manager, business manager and partners.
- Build and maintain a comprehensive balance sheet that outlines both asset titling and beneficiaries.
- Confirm your life insurance is in good order. Review rates, policy health and tax efficiency, and be aware of available alternatives.
- Create a “Need to Know” file for your surviving family members.
Doing these items may not eliminate all of the potential issues, but it will lay the foundation for taking your Legacy protection to the next level.
