October 16, 2021

Volume XI, Number 289

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Wealth Planning in 2021: Preparing For a Changing Tax Landscape

Since President Biden took office at the beginning of this year, there has been much buzz and conjecture regarding what the tax policy under the Biden-Harris Administration would look like.  In light of the recently released Department of Treasury’s General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, commonly known as the “Green Book,” we now have a better idea of the proposed tax law changes that the Administration will focus on implementing in the coming year.

While the Green Book contains various tax proposals that could significantly affect estate planning, it interestingly does not include a proposal to decrease the estate and gift tax exemption, which was a major topic of discussion during last year’s election cycle (click here to review our advisory on Estate Planning and the 2020 Election).  However, some Democrats in Congress nonetheless continue to argue for this reduction.  For example, Senator Bernie Sanders’ proposed legislation, For the 99.5% Act, would reduce the gift tax exemption to $1 million per person and the estate tax exemption to $3.5 million per person and would also impose new progressive estate tax rates ranging from 45% to 65%.

In any event, the Green Book contains the proposed tax laws that reflect the Administration’s top priorities and are more likely to be enacted than those proposals not included in the Green Book.  The Green Book proposals seek to reverse many of the tax laws included in the 2017 Tax Cuts and Jobs Act enacted under former President Trump, such as a proposed increase to individual income tax rates and an end to certain capital gains tax preferences, discussed in further detail below.

Green Book Proposals That Would Affect High Net Worth Clients:

Increase Top Marginal Individual Income Tax Rate for High-Income Earners.  The top marginal income tax rate would increase from 37% to 39.6% for taxable income in excess of the top bracket threshold.  For taxable years beginning January 1, 2022, this would apply to income in excess of $509,300 for married individuals filing jointly and $452,700 for single filers, and thereafter be indexed for inflation. 

Tax Capital Gains for High-Income Earners at Ordinary Income Tax Rates.  For taxpayers with adjusted gross income of more than $1 million, long-term capital gains and qualified dividends tax rates would increase to match the proposed ordinary income tax rates.  To the extent that a taxpayer’s income exceeds $1 million, rates would go from 20% (or 23.8% including the net investment income tax (“NIIT”)) to 39.6% (or 43.4% including NIIT).  This proposal currently includes a retroactive effective date of April 28, 2021.

Treat Transfers of Appreciated Property by Gift or at Death as Realization Events.  This proposal would eliminate the so called “step up in basis loophole,” which allows for an asset transferred at death to be “stepped up” to fair market value for cost basis purposes resulting in no capital gains tax imposed on the asset’s appreciation through date of death.  Instead, the transfer of an appreciated asset by gift or at death would be treated as sold for fair market value at the time of the transfer, creating a taxable gain realization event for the donor or deceased owner.  There would, however, be a $1 million per person (or $2 million per married couple) exemption from recognition of capital gains on property transferred by gift or at death, indexed for inflation.  In addition, certain exclusions would apply, including:

  • Residence.  $250,000 per person (or $500,000 per married couple) would be excluded from capital gain on the sale or transfer of any residence.

  • Surviving spouse.  Transfers by a decedent to a U.S. citizen spouse would carry over the basis of the decedent and capital gain recognition would be deferred until the surviving spouse dies or otherwise disposes of the asset.

  • Charity.  Appreciated property transferred to charity would not generate a taxable gain; however, the transfer of appreciated assets to a split-interest charitable trust would generate a taxable gain as to the share of the value transferred attributable to any non-charitable beneficiary.

  • Tangible personal property.  No capital gain would be recognized on transfers of tangible personal property (excluding collectibles).

Although the tax imposed on gains deemed realized at death would be deductible on the estate tax return of the decedent’s estate, deductions are not equivalent to tax credits and in high tax states such as New York, the additional tax could be substantial.

Impose Gain Recognition on Property Transferred to or Distributed from an Irrevocable Trust.  Any transfers of property into, and distributions in kind from, an irrevocable trust would be treated as deemed recognition events subject to capital gains tax.  In addition, while the generation-skipping transfer (“GST”) tax exempt status of a trust would not be affected, gain would automatically be recognized on property held in an irrevocable trust which has not otherwise been subject to a taxable recognition event within the prior 90 years.  The first possible recognition event would be December 31, 2030 for any trust in existence on January 1, 1940.  This proposal would also apply to transfers to, and distributions in kind from, partnerships and other non-corporate entities.  Elimination of Valuation Discounts.  The valuation of partial interests in property contributed to a trust would be equal to the proportional share of the fair market value of all of such property.  In other words, no discounts for lack of marketability or minority interests would be allowed in valuing transfers of partial interests in LLCs, corporations, partnerships or real property.

Summary

The legislative text of the Administration’s tax proposals will likely not be available until the fall.  It is important to note that any proposed tax law changes face a split 50-50 Senate, which means that the prospect of passing any tax reform at all is uncertain.  Commentators believe that the Green Book proposals will be the subject of extensive negotiation over the next several months, including significant opposition to large increases in capital gains tax rates.  In the meantime, we at Wiggin and Dana [link to PCS attorneys page] are available to discuss the Green Book proposals in more detail and to make proactive, tailored recommendations in light of the current changing tax law landscape.

Charles C. KingsleyLeonard Leader,  Vanessa L. Maczko,  Rani Newman Mathura,  Carolyn A. Reers,

Matthew E. Smith,  Mary Margaret CollearyMi-Hae KimErin D. Nicholls,  Marissa A O'Loughlin

Kaitlyn A. Pacelli, and  Beth A. Scharpf contribited to this article. 

© 1998-2021 Wiggin and Dana LLPNational Law Review, Volume XI, Number 238
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Michael Clear Estate and Trust attorney Greenwich Wiggin and Dana
Partner

As a Partner in the firm's Private Client Services Department, Michael regularly counsels clients on the far-reaching financial implications of estate planning, estate and trust administration, probate litigation, and business succession planning. Yet he is also a trained counselor with insight into the family dynamics these matters can effect. Known for his empathy and good humor, he helps clients take prudent action in the face of indecision, hopefully resolving contested issues before litigation.

Michael's estate planning practice includes assisting individuals and families in...

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Veronica Bauer Estate Planning Attorney
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Veronica R.S. Bauer is a Partner in the firm's Private Client Services Department in Palm Beach, Florida. Veronica focuses her practice on estate planning, estate and trust administration and charitable planning and administration.

Her practice includes assisting individuals and families with tax-efficient and practical estate, gift and income tax planning. She also assists fiduciaries and beneficiaries through estate settlement and trust administration matters

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Robert Benjamin Estate Planning Attorney Wiggin and Dana
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Bob has over three decades of experience as an estate planning and probate lawyer and previously served as Chair of Wiggin and Dana's Executive Committee (2009–2015). He is a Partner in the Private Client Services Department and counsels foreign and domestic clients in matters relating to estate planning, probate, and the taxation and administration of trusts and estates. He often works with clients who have complex estate planning needs, such as family business owners and artists. He is also a resource to lawyers at other firms in situations where difficult family dynamics or complex...

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Daniel Daniels Estate planning lawyer Wiggin Dana
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For three decades, Dan has dedicated himself to counseling families in preserving wealth from generation to generation. His clients include affluent individuals, family offices, business owners, C-suite executives and private equity and hedge fund founders. He assists them in estate and business planning, trust and estate administration, probate litigation, and more.

Dan has been named by Worth magazine as one of the top 100 trust lawyers in the United States. He is one of six trust and estate lawyers in Connecticut ranked in Band 1 by the international ranking service ...

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Helen Heintz Family and Estate planning lawyer Wiggin Dana
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Helen advises individuals, couples, families, and fiduciaries in all aspects of trust, estate, and guardianship matters, helping families navigate the legal landscape to achieve their goals.

As a Partner in the Private Client Services Department at Wiggin and Dana, Helen counsels individuals, couples, and families in tax-efficient estate, gift, and income tax planning. She advises individual and corporate fiduciaries regarding all aspects of trust and estate administration, including taxation and fiduciary law. She also negotiates and structures prenuptial and postnuptial agreements...

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