Will Biden's Tax Proposals Have an Impact on My Estate Planning?

President Biden’s tax proposals are at the center of what the White House estimates is a $3 trillion deficit-reduction plan. They will be immediately rejected by Congressional Republicans. However, the ideas set up Democrats’ approach to the debt-ceiling fight later this year, as Republicans are gearing up to ask for spending cuts.

Bloomberg’s recent article, “In Biden’s Tax-the-Rich Budget, Capital-Gains Rates Near 45%,” examines the details of the tax proposals in the budget request that the White House released recently. The proposed tax hikes by President Biden’s administration could have a significant impact on estate planning. The proposed changes in capital gains tax rates, corporate taxes, and estate and gift taxes could affect how individuals plan and manage their estates.

The proposed capital gains tax rate increase is one of the most significant changes that could affect estate planning. The increase in the capital gains tax rate from 20% to 39.6% for those earning at least $1 million could make it less attractive for wealthy individuals to hold onto their assets, especially those that have appreciated over time. The additional 3.8% surtax on investment income for those earning over $400,000 would bring the total tax rate on capital gains to almost 45%.

This change in capital gains tax rates could also affect estate planning for those with asset appreciation. The unrealized appreciation goes untaxed when an asset is passed down to an heir after the owner’s death. However, under the proposed tax plan, assets would be taxed when an owner dies. This change could have significant implications for estate planning, as individuals may need to consider how to manage their assets to minimize the tax burden on their heirs.

Corporate taxes are another area where the proposed tax plan could affect estate planning. The increase in the corporate tax rate from 21% to 28% could reduce the value of stocks held in corporate accounts. This reduction in value could make it less attractive for individuals to hold onto these assets, which could have implications for estate planning.

Biden's tax proposals to the tax rules on estate and gift taxes could also affect how individuals plan and manage their estates. The plan would make it harder for wealthy individuals and trusts to avoid taxes, which could mean that individuals must consider how to structure their estates to minimize their tax burden. The proposed changes to the tax rules on estate and gift taxes would also make it more difficult for individuals to accumulate savings in tax-favored retirement accounts, which could affect their overall estate planning strategy.

The proposed changes in the tax rules on carried interest could also affect estate planning. Private equity fund managers use the carried-interest tax break to lower their tax bills. Under current law, investment fund managers can pay the 20% capital-gains rate on a portion of their incomes that would otherwise be subjected to the 37% top individual-income rate. Under the proposed tax plan, the federal government would eliminate this tax break. This change could have implications for estate planning as it could reduce the value of private equity investments held in estate accounts.

Overall, the proposed tax hikes could have significant implications for estate planning. Individuals may need to consider structuring their estates to minimize their tax burden and manage their assets to take advantage of tax-efficient strategies. Estate planning professionals may also need to adapt to these changes to ensure their clients adequately prepare for the proposed tax plan’s implications. While it is still uncertain how these proposals will fare in Congress, individuals must stay informed about these potential changes and take steps to plan accordingly.

For individuals who have already engaged in estate planning, it may be necessary to review their plans and make adjustments to account for the proposed changes in tax rules. This review should thoroughly examine their current estate plan, including wills, trusts, and beneficiary designations. For example, individuals may want to consider shifting their assets into tax-advantaged accounts or transferring assets to their beneficiaries during their lifetime to minimize their tax burden.

One area where individuals may want to pay particular attention is their retirement accounts. The proposed changes to the tax rules on Roth individual retirement accounts and tax-favored retirement accounts could affect individuals’ overall estate planning strategies. Individuals may need to consider how much they can contribute to these accounts and whether they should consider other retirement savings options.

Another consideration for individuals is how these changes could impact their charitable giving strategies. Charitable giving can be an effective way to reduce an individual’s tax burden. However, Biden's tax proposals change tax rules to make it more difficult for individuals to take advantage of these strategies. As a result, individuals may need to explore other options for charitable giving, such as donor-advised funds or charitable remainder trusts.

For individuals who have not engaged in estate planning, it is critical to start planning now. The proposed changes to the tax rules could significantly impact an individual’s estate plan, and waiting too long could limit their options. Engaging with an estate planning professional can help individuals understand their options and develop a plan that meets their needs and goals.

It is also essential to note that the proposed tax plan is still subject to change as it passes through Congress. While the proposal provides some insights into the direction of tax policy, it is vital to stay informed as the plan evolves.

In conclusion, the proposed tax hikes could significantly impact estate planning. Individuals should consider reviewing their estate plans to account for the proposed changes in tax rules. An experienced Austin estate planning attorney can help individuals understand their options and develop a plan that meets their needs and goals. While the proposed tax plan is still subject to change, individuals need to stay informed and plan accordingly.

Reference: Bloomberg (March 9, 2023) “In Biden’s Tax-the-Rich Budget, Capital-Gains Rates Near 45%.”