Broker Check
Planning your Legacy in 2021

Planning your Legacy in 2021

| May 11, 2021

Most of my clients that fall into the category of ‘high net worth individuals’ have been worried about the future as of late. With the new president and political powers has them contemplating about the legacy that they want to leave behind and how to do it effectively.

In the past, there were several ways to leave money behind for your kids. Take the farmer who bought a piece of land 40 years ago and today it is worth millions. Rather than sell it while he/she is alive, the smart thing to do was to pass away with ownership and then transfer it to the kids, with the direct benefit being a much smaller tax bill. Or think about the retiree who has owned the same stocks like Coca Cola or Microsoft for the past twenty years. The stocks are up 1000% today and carry a huge tax liability if he sells it while alive but if he transfers after death, his kids get to reset the original starting price (cost basis) and again, avoid paying any meaningful taxes. So, as we look past 2021 and beyond, it has become apparent that old ways of creating your legacy have changed and as a result, so should your estate plan. What exactly is changing? Tax Laws.

Recently, permanent life insurance has been the answer for so many of my clients as millions of dollars in generational wealth are up for grabs and life insurance seems to be one of the few ways to accomplish your goals of maximizing your gift and minimizing your taxes. Make no mistake about it; tax change is coming and here are the 2 biggest ones you need to know about.

1-Adjusting the estate tax exemption. - Currently, you are “allowed” to die with a $11.7 million without receiving a tax bill ($23.4m if you are a married couple). But if you have more than that, anything over the threshold will be hit with a whopping 40% estate tax. You can understand why this is such a big deal for both the government (as a revenue source) and individuals (who want to stay below the threshold). But with the new infrastructure bill being worked out, there is a need for additional revenue to pay for it and the first place President Biden is looking at is the current Estate Exemption. Biden's preliminary tax proposal calls to reduce the exemption from $11.7 million to $3.5 million ($7m as a married couple). The main idea being that the reduction will lead to a significant increase in the number of people paying estate taxes and increasing government revenue. And if that is not bad enough, the 40% tax percentage is not set in stone and could easily be increased back to 55%, like it was in the late 1990s.

2-Eliminating the ‘step-up in basis at death’ provision. - Currently, those who inherit stock portfolios or real properties end up paying little capital gains tax. Instead of inheriting mom or dad’s original cost basis, the heir(s) only pays tax on the difference between the date of death value and the value on the day they sell it. Because of this provision known as “stepped-up basis”, any appreciation of the affected property/stock that occurred during the parent’s lifetime will never be taxed. Simply put, a Step-up in basis discourages people from realizing capital gains while they are alive. Well, that is all about to change as Biden’s plan calls for an outright elimination of the Step Up. Instead, you will either have a carryover basis of the original purchase price or immediate taxation at death. Either way, the tax savings disappears immediately and as a result, it may encourage capital gains realization while people are alive because your retirement tax bracket is likely lower than the 40% Estate tax. Additionally, this will also add significant revenue for the government’s bottom line.

While both ideas have not been passed into law just yet, if the federal estate tax exemption is reduced and/or the step-up in basis is taken away, many will have to rethink how to accomplish their legacy goals.  If it has been a while since you reviewed your own estate strategy, now is the time to get all your ducks in a row before it is too late. If you need help or are just getting started, give me a call! – Patrick