By Lee Sherman
President Joe Biden is on record as saying that wealthy Americans are not paying their “fair share” of taxes. Biden is transparent about his plan to raise the taxes of those making more than $400,000 a year. Under the Biden plan, it’s likely that the estate tax will be affected. The good news for wealthy families is, because lawmakers are currently focused on pandemic relief, and the existing terms of the estate tax aren’t set to expire until the end of 2025, you’ve got time for estate planning and asset transfers before any new tax laws go into effect.
The contrast with former President Donald Trump’s tax cuts for the wealthy and large corporations couldn’t be more stark. Biden is expected to dismantle almost all of Trump’s signature tax policy. Wealthy people will pay more in Social Security taxes, be subject to higher rates of taxation, and be subject to increased taxes on inherited wealth and capital gains.
Individuals are currently allowed to transfer up to $11.7 million to their heirs without having to pay taxes. The new tax proposal would lower that amount to $3.5 million, lower the lifetime exemption for gifts to $1 million, and raise the tax rate on transfers over those amounts to 45%. Biden’s plan also rescinds the “step up in basis,” which taxes a stock’s appreciation when the owner of that stock dies, rather than let heirs inherit unsold stock at its current fair market value.
“Our tax system cannot be tilted toward corporate interests and the wealthy, while those that are sustained predominately by wages bear an unequal burden,” said Treasury Secretary Janet Yellen in her Senate hearing. “Biden will require corporations and the wealthiest Americans to pay their fair share. On the President’s estate tax proposal in particular, it may be helpful to note that only about the wealthiest six out of every thousand estates would face any tax–less than 1% — and every couple with assets under $7 million would be fully exempt from the estate tax.”
As Yellen points out in her testimony, reducing wealth inequality is a priority for the new administration. But changes to the tax code won’t happen until after the administration has vaccinated the majority of the population and reopened business and schools.
Biden has also announced his intention to follow-up the $1.9 trillion stimulus plan with an even more ambitious (and expensive) infrastructure plan. Both of these plans will not be enacted with the stroke of a pen but will instead spend time working their way through the legislature.
However you define that “fair share,” there is still plenty you can do to minimize your tax burden. Remember that tax policy is just one aspect of estate planning. Interest rates remain at historic lows, making borrowing easier. Ask your financial advisor about grantor retained annuity trusts and charitable lead annuity trusts, both of which can help you transfer your business assets or securities into an irrevocable trust.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.