Opportunity Favors the (Tax) Prepared image

Opportunity favors

the (tax) prepared

Are you advising clients with incomes above $400,000 or household net worth above $3.5 million? You may want to talk to them today about how a changing tax plan could impact them—and what they can do about it.

The American Families Plan

This plan proposes to increase taxes in several ways: 

  • Return the top marginal federal income tax rate to 39.6% (currently 37%) 
  • Lower existing income thresholds for the top bracket to $452,701 for single/$509,301 joint (currently $523,601 single/$628,301 joint)
  • Tax long-term capital gains and qualified dividends (which normally receive preferential tax treatment) as ordinary income for households with income (including investment income) above $1 million.

Client considerations

  • Clients who face higher federal income taxes could find new value in tax-deferred strategies , which allow them to control when they recognize income, and how much.  This includes qualified plans, nonqualified deferred compensation, nonqualified annuities and life insurance.
  • Clients who face losing the favorable long-term capital gains rate may wish to either reduce their net worth (by gifting or trust funding), or by liquidating the assets to harvest today’s lower rates.  Tax deferral can also help them control timing and how much income is recognized on future growth of the after-tax proceeds of this liquidation.

The Sensible Taxation and Equity Promotion [STEP] act

This bill plans to eliminate the “stepped-up basis” rule on gifted or inherited assets. It’s a massive change to a long-standing wealth-transfer strategy.  

Today, even if certain assets have grown substantially over many years, they are not taxed on the growth when they are passed on. An inheritance gets a “step up” in basis to the full market value at the time of inheritance and a gift gets a “carry over" of the donor’s basis when the gift is made. This Act will make all that growth taxable to the decedent or donor. There is an exemption for the first $1 million in capital gains; a $500,000 homestead exemption; a 15-year “payment plan” on the capital gains due; and carryover basis for heirs of a family-owned business such as a family farm.

Client considerations

  • Clients who own appreciated assets that are earmarked for wealth transfer may consider gifting these assets in 2021, to ensure a “carry-over” or “stepped-up” basis so they (or their estates) don’t face a large capital gains tax bill when transferring assets in the future. 
  • Outright gifts to heirs, charitable donations of highly appreciated assets, and transfers into a number of different types of trusts are options to consider. 

The For the 99.5% act

This bill focuses on sweeping changes to gift, transfer and estate taxes. 

The estate tax exclusion amount would be reduced from its current level of $11.7 million to $3.5 million– lower than it’s been in over a decade! That means many investors will be facing estate tax exposure for the first time in their lives.

In addition, the exclusion amount will no longer be fully usable as a gift tax exclusion while alive.  The lifetime gift tax exclusion amount would be reduced to $1 million.  Further, the annual gift tax exclusion amount of $15,000 per recipient will be eliminated, and donors will be limited to a single, flat $20,000 annual gift tax exclusion across all recipients.

Client considerations

  • Clients can reduce the size of their estate through direct gifting, for example through a nonqualified variable annuity.  While traditionally there have been concerns with taxes on the deferred growth when transferring these annuities to heirs, today’s annuity landscape offers strategies to ensure non-spouse transfers –such as from a parent to child—don’t result in a large upfront income tax bill for either party.
  • Clients who wish to reduce their estate in 2021 without making a direct gift may consider the use of an Intentionally Defective Grantor Trust (IDGT).  Transfers into such trusts count against the lifetime gift/transfer tax exclusion of $11.7 million and removes the assets (and their growth) from an estate, while providing some control over when and how the heirs receive their inheritance.
  • The Act may impact the future utility of Grantor Retained Annuity Trusts (GRATs), Charitable Remainder Trusts (CRTs), and Generation Skipping Trusts (GSTs).  Clients considering these trusts should discuss the advantages of creating and funding them in 2021.

Opportunity favors the prepared

While a single political party controls the White House, the Senate and the House of Representatives, it would be prudent to prepare for:

  • Higher income tax rates for high income earners and high net worth households
  • Elimination of the step-up in basis on inherited assets
  • A reduction of the estate and gift tax exclusion amounts

Changes may be in the future, but the discussion is now. Talk with your clients today to ensure that a careful plan is in place to position them in 2022 and beyond.

Partner with us

To learn more about helping your clients plan for protected retirement income, contact your Lincoln representative today at 877-533-0265. And follow us on LinkedIn and Twitter for regular insights and tips on retirement income planning conversations.

About the author

Robert Vashko

For over 17 years, Bob Vashko, JD*, CFP®, CFS® Advanced Sales Consultant - Variable Annuities has helped advisors and their clients accumulate, distribute and transfer wealth in accordance with the clients’ goals.

Bob began his legal career in 1997, practicing law in New Orleans with a focus on intellectual property and estate planning. In 2008, he transitioned to the financial sector as a Director of Advanced Markets, where he was in high demand by annuity wholesalers across the country as a partner on complex income- and estate-planning issues. He was often called upon to confer directly with clients’ CPAs and estate planning attorneys, and was a frequent speaker at industry conferences and top-producer sales meetings for some of the largest financial services firms in the country.

Bob strives to be a trusted and valued resource to financial advisors through his deep knowledge of the tax- and estate-planning opportunities available through the use of variable and fixed annuities. He takes pride in being able to explain advanced sales strategies in simple terms that both advisors and clients can easily understand.

Bob holds a B.A. in political science from Western Illinois University, and a J.D. from Loyola University-New Orleans, where he continues to reside with his wife and their three children.

* licensed not practicing