We spent a lot of time last year discussing estate and income tax planning in anticipation of possible tax law changes hinging on the outcome of the United States Presidential and Senate elections. While we now have clarity on the election outcomes, we are still in a position of needing to make significant estate and income tax decisions without complete clarity around potential changes in tax law. It feels like the new normal …    

What we do know is the proposed tax bills provide an indication that higher estate and income tax rates are likely, which, for us, means taking a proactive, opportunity-driven approach to estate tax and capital gains planning for Matter families.   

What’s the Hurry?

In 2020, we rushed to complete transactions by end of year in order to eliminate concerns around potential changes in 2021 tax laws. Now, there is a sense of urgency around setting plans in motion before tax laws change again (presuming changes will be forward-looking, not retroactive). As many families know, some planning decisions, such as setting up legal structures and sale transactions, can take significant time. If we do not begin planning for these transitions imminently, we may not be able to complete the process before laws change.   

The uncertainty of timing and potential volume of activity means we need to start planning now, so we are prepared with well-developed and strategic plans in place, whatever the future brings.  

Where Are We Now… and What Might Be Ahead?

Current tax laws provide for a favorable estate environment based on the historically high gift tax, estate tax, and Generation-Skipping Tax (GST) exemptions:   

  • $11.7M per taxpayer and $23.4M for a married couple   

Any amount in excess of these totals is taxed by the Federal government at a rate of 40%.   

The various tax proposals could have significant estate implications, including:  

  • reducing the gift and estate exemption amount to $3.5M per taxpayer and $7M per married couple  
  • raising the estate tax rate (varying from 45% to 65%)    
  • reducing the lifetime amount to be gifted from the current $11.7M to $1M per taxpayer   

Capital gains tax laws could change as well. In the last 40+ years, the capital gains tax rate has been as low as 15% (2012) and as high as 39.87% (1979). The current long-term capital gains tax rates for most Matter families is 20%, plus a 3.8% Affordable Healthcare Act surcharge (23.8% total). Current tax proposals suggest the rate could return to (or eclipse) the 1979 high.  

What Should We Do About It?

It is important to strike a balance between trying to take advantage of current tax laws that seem favorable and forcing transactions that may decrease or eliminate your control over assets while adding complexity to your financial world. We recommend asking yourself some key questions to determine what is right for you when considering the current and future tax climates.   

  • Is the tax savings worth the disruption or change to your financial world?    
  • Can you afford to do it?    
  • What if you have decades more to live and are not sure if you will need the assets versus irrevocably gifting the assets to a spouse or children?  

Because each situation is unique, there is not a simple answer, but the following examples might help you think through some options. 

Consider Gifting Your Exemption Amount Now

There are many strategies and structures available to help you utilize the current $11.7M exemption. Intentionally Defective Irrevocable Trusts (IDITs) and Spousal Limited Access Trusts (SLATs) are effective ways to make a transfer of assets to a trust that could utilize your remaining exemption. A SLAT may be a more preferable option if you would like to retain access to the assets for your spouse.  

Example:  A family used $10M of exemption in 2012 to maximize their planning under 2012 laws. They recently made $13.4M of gifts to the same respective trusts in order to use the remaining balance of their gift, estate, and GST exemption.

It May Make Sense to Accelerate the Sale of a Business or Asset(s)

Current tax proposals range from increasing the capital gains rates a few percentage points to increasing the rate to the ordinary income rates for those making over $1M per year (currently 37%).   

A large sale can push taxpayers into the $1M+ category. If you are considering selling a valuable asset, it may make sense to do so prior to the potential tax increase in order to avoid paying 10-20% more in taxes on the same asset in the future.   

Example:  A family has a company that is worth $100M and their gain will be $90M. Under current income tax laws, they would owe $21.42M in Federal capital gains tax and net $78.58M. If the rate were changed to 37%, they would owe $33.3M and net $66.7M.  

Other Considerations

Proposed tax plans may eliminate or alter some estate-minimizing techniques  – things like discounts for lack of control and requiring Grantor Retained Annuity Trusts (GRATs) to be 10 years in length. The processes of creating new trusts or entities, setting up new accounts, completing transfers, and addressing other action items by December 31 is challenging in most years. The potential volume of activity will make this even more complicated this year.   

Planning Ahead

We understand that most people are not seeking to add complexity to their lives this year, financial or otherwise. That said, one of our primary goals at Matter is to help families sustain their wealth for generations – and the potential tax changes are too significant to dismiss. Even if tax laws do not change in 2021, seizing current opportunities and preparing for the future is an important part of the planning journey. What’s more, there are scheduled estate tax law changes looming in 2026, so the potential issues are not going away.