Tax law can be one of the most complex and impenetrable areas of government policy in the United States. Not to mention that these laws are always changing, and in the center of constant political debate and scrutiny.
This month, the Biden administration released its new tax plan, which is expected to be implemented as soon as 2022. Some of the biggest changes the administration plans to make are regarding estate and gift taxes.
That’s why it’s extremely important to sit down with an experienced estate planning attorney like our team at Reardon Law Firm and discuss how these changes will affect your California estate plan and your ability to pass your wealth down to future generations.
From San Diego estate planning attorney Jennifer Reardon, here are the top 3 ways Biden’s new tax policies will affect your estate plan, and what you can do to prepare for the changes.
1. Doubling the capital gains rate
The current capital gains tax rate is 20%, and under Biden’s proposed plan, that number would nearly double to 39.6%.
While this mostly applies to high-earning financial transactions like stock trading, it’s important for anyone with an estate plan to note that it will also apply to more commonplace transactions as well.
Here are some examples of transactions that could be affected by the capital gains tax hike:
- Selling the family business
- Selling a home
- Selling a car or other valuable possession
2. Changing the rules for certain tax exemptions
Currently, an estate is only taxed upon a person’s death if the value of the transfer exceeds $11.7 million. Many analysts expected Biden’s new plan to lower this “exemption rate”– some speculated as low as $3.5 million.
But that didn’t happen. The exemption rate remains at $11.7 million under the new plan, with the tax rate remaining at the historic low of 40%.
The new plan does include a new exemption for capital gains assets that are passed on to heirs after a person’s death– up to $1 million. In addition, it leaves in place the current $250,000 exemption on taxable gains in the value of a person’s primary residence.
3. Getting rid of the “step up in basis”
The final major change that estate planners need to keep their eye on is the removal of the “step-up in” basis for estate and capital gains taxes.
Currently, heirs may defer taxes on inherited home gains until they sell the property. As a result, they only pay taxes on the value of the estate on the date of death, rather than paying taxes on the value of the estate at the time of the sale. This change is expected to raise money for the government through an increase on both capital gains and estate taxes.
For example, under the current system, inheriting a million dollar house would cost approximately $20,000 in capital gains tax, but under the new system, it could cost as much as $70,000.
How to prepare for these new changes
Financial planners and tax attorneys are getting a lot of calls these days from Americans concerned about the effect that these new changes will have on their ability to pass on their wealth to their family after their death.
Here are a number of steps you can take to prepare for these changes and protect your inheritance:
- Gifting assets to family members
- Spending before you die
- Place your assets in trusts and retirement accounts
- Hire an experienced estate planning attorney to discuss all of these options and develop an exhaustive plan to protect your estate
Contact the Reardon Law Firm to get all your questions answered today
At the Reardon Law Firm, it’s our job to make sure you can provide for your family after your death. We have helped clients in San Diego and throughout Southern California with their estate planning, tax planning, and trust administration.
Contact us today to schedule a free consultation and talk about your estate plan.