Taxes
Zoe Team and James Underwood, CFP®, CPA (Zoe Network Advisor)
4 min read
Uncertain tax laws require proactive financial planning to mitigate potential negative impacts on your estate and income.
Acting early on tax strategies ensures you are prepared regardless of whether proposed legislative changes are ultimately enacted.
Reviewing your estate plan and current tax positions can uncover opportunities to optimize your wealth before new rules potentially take effect.
Proactive planning allows you to restructure your assets and estate today, protecting your wealth from potential future legislative shifts.
Focus on foundational estate and tax strategies that remain beneficial regardless of specific legislative updates, such as gifting or trust reviews.
No; acting early often provides more flexibility and time to implement complex strategies that could be restricted under new tax regulations.
We’ll walk through what you should do in case these uncertain tax changes occur! But even if they don’t apply to you today doesn’t mean there isn’t plenty for you to take action on early on.
As the old saying goes, nothing can be said to be certain except death and taxes. The part of the saying they forgot to tell you is that there will be a lot of uncertainty around both. We are seeing a great deal of uncertainty now as it relates to the tax code. Will income taxes go up for me? Will I have an estate tax? Will my capital gains rate change? These estate planning and tax law changes can have an impact on your long-term planning and goals, so it’s crucial to understand what is being proposed and what you can do about it.
Reduce the current gift and estate tax exemptions from $11.7M to $3.5M and increase the estate tax rate to 45%
Reduce the annual tax-free gift amount from $15,000 per person with no limits on people to a capped amount
Potentially get rid of the step up in basis at death
Raise the top tax rate from 37% to 39.6%
Change taxing capital gains at 20% to taxing it at ordinary income rates for taxpayers with over $1M in income
After reading this you are probably thinking one of two things:
1) I am about to pay more in taxes, so what should I do?
2) This has no impact on me, so I don’t need to worry. We will address what you should be thinking about in both scenarios.
If there is a chance you may be affected by the tax law changes above, begin the conversation with your advisors (financial planner, CPA, and attorney) now. All of the below planning strategies assume that the tax bill passed is not retroactive and effective as of 1/1/2021.
If you now find yourself with an estate tax problem, there are a few things to consider. You may want to look at transferring assets out of your estate now. To accomplish this, you may want to transfer assets to an irrevocable trust. This would remove the assets out of your estate and the value would be frozen as of the date of the transfer. Depending on the size of the gift and previous gifts made you could make the transfer without paying any taxes.
Additionally, depending on the trust type and structure you may be able to pay the tax on the assets in the trust personally which would reduce your estate and allow the trust assets to grow tax free. If you do annual gifting to a 529 account, you may want to accelerate the gifting and make up to 5 years’ worth of gifts at once. Charitable Remainder Trusts and Charitable Lead Trusts will also become good options for clients who are charitably inclined.
If you now find your capital gains rates increasing there is planning that you can do. See if Roth conversions make sense before the end of the year. Additionally, you could recognize gains before the end of the year to take advantage of the lower rates now. If the rates increase, you may want to delay tax loss harvesting until next year when the losses are more valuable.
If the step up in basis at death is eliminated, you may want to revisit your estate plan and beneficiaries. Now, inheriting the “right assets” is going to be more important than ever. If there are low basis assets consider charitable beneficiaries or beneficiaries with a low tax bracket.
For everyone else, just because these specific proposals do not apply to you today that doesn’t mean you will be spared from any tax law change in the future. Minimizing taxes over your life is an evolving strategy and just because something works today does not mean it will work in the future. The managing of taxes throughout your life can have the largest impact on your assets and your retirement.
Every dollar saved on taxes is a dollar you can spend doing something you love. Managing taxes can be incredibly complicated and is one of the main reasons to work with a financial planner who focuses on the entire plan and not just the investments. As with any major tax decision you should consult with your tax advisor before acting.
James Underwood is a vetted Zoe Network Advisor, Wealth Manager at Buckingham Strategic Wealth and lives in Atlanta with his wife Shannon, son Bruns, daughter Mary Collier and dog Dexter.
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